What is equity curve?

How do you read an equity curve?

Look at three things: the slope, meaning how fast it rises; the drawdowns, meaning how far it falls from each high; and the duration, meaning how long it takes to set a new high. Two strategies with the same final return can have completely different curves, one climbing steadily and the other making everything in two months and giving half back in between. A curve that spends nine months going sideways describes a strategy most people would abandon before it worked, whatever the final figure says.

What is the difference between an equity curve and a balance curve?

A balance curve moves only when a trade closes; an equity curve also counts the profit or loss of trades still open. The difference matters because the risk lives in open trades. MetaTrader 5's strategy test report measures the two separately, as a balance drawdown and an equity drawdown, and prop firms judge equity: FTMO measures its loss limits on equity, which it defines as "Balance + Open Positions P/L ± Swaps – Commissions". When you judge a track record, ask for the equity curve.

Which equity curves should you distrust?

Distrust smoothness you cannot explain. A system that averages down, or leaves losing trades open, can show a balance curve rising in a near-straight line while its equity sinks, because the losses sit in trades that have not closed. Distrust curves from backtests with no spread, no slippage and no position-sizing limits, which produce the smooth diagonal lines in advertisements, and curves with no stated start date, starting balance or trade count. A curve worth trusting is drawn from realised results with costs included, which is why our published figures come with the strategy list and its record of what was cut.

What is equity curve trading?

Equity curve trading means changing how much you trade based on your own recent results. The common version stops trading a system, or trades it smaller, when its equity curve falls below its own moving average, and resumes when the curve climbs back above it. The aim is to sit out a system's bad patches.

Does trading the equity curve work?

Only if results cluster, meaning a loss makes the next loss more likely. If each trade is independent of the last, skipping trades after losses does not change the odds of the trades you still take. You simply take fewer of them, including the wins that would have ended a losing run. So the first question is whether your results cluster at all.

We ran that check on a year of gold's own daily direction: 257 trading days from August 2025 to August 2026, the same days as our losing streak study. If down days cluster, there are fewer and longer runs of up days and down days than chance produces.

The shortfall in runs is well within chance (p = 0.48): over this year, gold's down days arrived about as coin flips would. Even the longest losing streak, 9 days, was ordinary. Shuffling the same 257 days into random order produced a streak at least that long in 10.3% of 20,000 shuffles, so roughly one year in ten should contain one.

For a strategy whose results follow gold's day-to-day direction, an equity-curve filter would have had nothing to exploit that year. Your own results may differ, and the check is simple arithmetic. Count your losing streaks by length. If L is your share of losing trades, chance alone predicts that a fraction L^(k−1) × (1 − L) of your losing streaks are exactly k trades long. At a 60% loss rate, with 50 losing streaks in total, that is 50 × 0.4 = 20 one-trade streaks, 50 × 0.6 × 0.4 = 12 two-trade streaks and 50 × 0.36 × 0.4 = 7.2 three-trade streaks. If your counts match, stopping after losses reduces how much you trade without improving the trades.

How do you use an equity curve in practice?

• ·Plot equity, not only balance. Open trades are where the risk is, and prop firm limits are measured on equity.
• ·Measure the deepest fall and the longest stretch without a new high. Compare the first with your loss limits and the second with your patience. See maximum drawdown.
• ·Count the trades. A curve of 40 trades says far less than one of 400, and one bad month can reshape a short curve completely. See sample size.
• ·Check for clustering before adding a filter. Run the streak count above on your own results before trusting any rule that pauses trading after losses.