How to Cut Risk After Three Losses

The rule on a run of six losses

Cutting risk after three losses is a rule about size: one per cent a trade, halved to half a per cent after the third loss in a row and kept there until a win. On a run of six losses in example figures, on 10,000 dollars, the first three losses are the same under any rule, 100, 99 and 98. From the fourth the cut rule risks half as much, so the run ends at 9,558 instead of 9,415, a fall from the top — the drawdown — of 4.4 per cent instead of 5.9. The rule does not know whether the fourth trade will lose. It makes the fourth, fifth and sixth cheaper if they do, and it costs half a win if they do not.

Dropping a gear on a hill

Picture a gear lever dropped into a lower gear on a hill. The engine is the same and the hill is the same; what changes is how much is asked of the engine for each yard of road. Cutting risk after three losses is that lever. One per cent is the usual gear; half a per cent is the lower one, and the rule moves the lever down at the third loss in a row and back up at the first win. Nobody decides in the moment whether the hill feels steep. The lever is moved by the count, and the count is on the History tab for anyone to read, which is what makes it a rule and not a mood.

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