What is a Forex drawdown and how to get out of it?
27 / March / 20 Visitors: 173 ★★★★★
In addition to profitable Forex transactions, there are unprofitable ones. Several losing trades are the so-called drawdown. For example, we deposited $ 1000, suffered losses of $ 100. Now the deposit is $ 900, the drawdown was $ 100 or 10%.
But drawdown can also be an advantage, since situations often arise when doubling efforts, working capital, etc. during the drawdown brought in the final result increased profits.
So what is a drawdown on Forex in simple words? This is the current decrease in deposit, expressed as a percentage, points or monetary units.
The following types of drawdowns are distinguished:
Shows how much the size of the initial deposit has decreased. At the same time, open transaction obligations are unimportant - only the final size of the deposit is important. If our deposit is $ 1000 and after the transaction was closed it became $ 1100 - the absolute drawdown is zero. Although the obligations under the transaction reached, for example, up to $ 150. if we closed the deal at this moment, then the drawdown would be the same $ 150.
Conclusion: the absolute drawdown is not very informative when trading on Forex.
It represents the difference between the maximum and minimum funds according to the results of trading. Example: deposit of $ 1000. A trader makes the following transactions: + 50 $, -100 $, + 100 $, + 70 $. Now on deposit 1000 + 50-100 + 100 + 70 = $ 1120. The absolute drawdown was zero. And the maximum is $ 100.
Note that the maximum drawdown may exceed the size of the initial deposit in case of profit, and later - losses.
A very important indicator of the success of a trader. It represents the maximum amount by which the deposit was reduced during trading in relation to the initial deposit amount. It is expressed as a percentage.
Example. Deposit 1000 $. The relative drawdown for an open position reached -200 $. And although the deal closed with a profit of $ 100, the actual size of the relative drawdown remained the same - $ 200.
Floating and fixed drawdowns are also distinguished. Fixed is calculated on the balance sheet, and floating - on equity, that is, free funds in the trading account.
So, we figured out what the drawdown on Forex is and what types of drawdown are. Let's determine its allowable size and try to analyze the drawdown.
It is best to calculate the allowable drawdown percentage. A rather relative and individual parameter, but still:
if the drawdown reaches 20% - this is quite acceptable.
20-40% - a little worse, but also acceptable.
40% and higher - the risk of losing a deposit is very high.
The last item is suitable only for accounts with aggressive trading. Higher bids - more profit if successful. For calm stable trading, it is better to adhere to a drawdown of no more than 10-20% of the deposit.
So, how to get out of the Forex drawdown? You can do it slowly and calmly or quickly and aggressively.
With a calm option, we just continue to trade, not trying to "recoup". We trade as usual, without increasing the lottery.
When aggressive, lottery is increased, we fight for each point of profit. Risks are increased.