![]() ![]() For example, would you stay in the game of forex trading if you lost 20 trades in a row? Do you think you have the risk tolerance for drawdown periods? And, what’s the drawdown percentage you can take in your account value in order to continue trading and winning trades?Īnd this is exactly why it’s crucial to have your risk management strategies in place! More importantly, you need to set a maximum drawdown percentage you are willing to risk when you lose money in the markets. That way, it is still an 80% profitable trading strategy but it does raise some questions. But just because it is 80% profitable, it doesn’t mean that you will win 8 out of every 10 forex trades you make, and thus, a forex drawdown could occur.īasically, you could lose the first 20 and win the other 80 trades. Sure, a trading strategy that is 80% profitable sounds like a pretty decent edge to have. ![]() After all, it is one of the main reasons why we develop trading strategies and a trading system. When trading the forex market, we forex traders are always looking for an EDGE. What You Can Learn From a Drawdown and Losing Trades? Also, if needed, you can use a demo account from your forex broker for several days, and get back to forex trading in the real live market when you get your confidence back. Therefore, it is recommended to stop trading and get back into the trading routine when you are more focused and you set aside all the negativity. In this situation when you experience a large drawdown in your account, there’s a high risk that you will continue your losing streak. Occasionally, even the most successful forex trader can get into a period of ’tilt’, which is a poker term that refers to a situation when a trader is losing control and makes bad trading decisions, and has no trading plan. These include:īeyond that, you should take into consideration that trading is a tough business. There are several factors that increase your drawdown risk and the downside volatility in a trader’s account. The Biggest Causes of Drawdowns in Forex Trading In a simple explanation, a forex drawdown is the largest amount you lose when trading currency pairs before you start making a profit again in your trading portfolio. It is calculated as the percentage a trader lost from the initial peak value to the new peak (or the low point at the same period). Simply put, a drawdown refers to the reduction of one’s capital after a significant amount of losing trades. Your account has experienced a $100,000 drawdown. (Plus some hair…) This is what many traders call a drawdown. What percentage of your overall balance would you have lost? The answer is 50%. What could happen? I mean, there’s always a significant risk of losing money when you trade different asset classes, especially when you are placing trades in volatile markets.įor example, let’s say you had $200,000 in your account balance and you lost $100,000. So let’s say you didn’t use risk management rules. Or, in other words, how to use forex drawdown to better manage the risk in your trading account? What is a Drawdown in Trading? It may not be as pretty, but it is crucial you understand the risks each and every trade can carry. ![]() There’s a different side to it too that we will explore further in this blog. Still, it is not all unicorns and rainbows. As we touched on in the previous chapter, risk management in forex trading can make you money in the long run if you approach it with a good strategy and patience. ![]()
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