What a probability claim needs
A statement like "this setup works 83% of the time" needs exact rules, a large documented sample, realistic costs and out-of-sample testing. Even then it describes the past, with uncertainty that is wide on small samples. A probability written next to a chart in someone's notes is an opinion, and the playbook never displays one.
Losing streaks are normal
Streaks happen even when nothing is wrong. As pure arithmetic: if a method won exactly half its trades, the chance of at least one run of five losses somewhere in 100 trades is about 81%. Plan for streaks before they happen.
Drawdowns also hurt more than they look: after a 20% drawdown you need a 25% gain to get back, and after 50% you need 100%.
Rules that protect the account
These rules are not optional extras; they are what keep any method alive long enough to be tested.
- Risk a small, fixed fraction of equity per trade (often 0.5–1%).
- Never increase risk after a loss, and never use martingale.
- Set a daily or weekly loss limit and stop when it is hit.
- Avoid oversized leverage; size from the stop, not from the margin available.
- Do not trade a size you cannot calculate.
| Risk per trade | After 5 losses in a row | After 10 in a row | After 20 in a row |
|---|---|---|---|
| 0.5% | −2.5% | −4.9% | −9.5% |
| 1% | −4.9% | −9.6% | −18.2% |
| 2% | −9.6% | −18.3% | −33.2% |
| 5% | −22.6% | −40.1% | −64.2% |
Bullish example
- 1A bullish setup passes the checklist with a 2R target.
- 2You risk 1% of equity, sized from the stop distance.
- 3It loses. Your next trade is still 1%, not 2%.
Bearish example
- 1A bearish setup passes the checklist.
- 2You have already lost 3% today against a 3% daily limit.
- 3You skip it, however clean it looks.
What confirms it?
- Risk per trade is fixed before entry.
- Size is calculated from the stop distance and the contract specification.
- Loss limits are written down and respected.
What invalidates it?
- Risk is increased to recover a loss.
- Size is chosen from available leverage instead of the stop.
- A probability figure without a documented backtest is treated as fact.
Common mistakes
- Believing a high claimed win rate means losses will be rare.
- Risking 5% because "this one is a sure thing".
- Martingale: doubling after each loss.
- Removing the stop to avoid taking a loss.
Replay exercise
- In your paper trading account, write down your risk per trade, daily loss limit and weekly loss limit.
- Replay twenty sessions and apply them strictly, including stopping when a limit is hit.
- Review your largest losing streak and the drawdown it caused.
Quick quiz
Pick an answer to see the explanation. Nothing is saved.