DROP IN TRADING

2022년 2월 23일

Hello!
Today I want to talk about drawdown in trading.
This topic is very important because it is directly related to the possible loss of all capital.

What is a drawdown?
When trading, you can make profits as well as take losses.
When you lose too much and the account decreases significantly, this is called a drawdown.
Losses in trading are normal and should not be feared.
But you should not lose too much, a minus of 15-20% is considered a moderate minus value, and these losses must be controlled.
Drawdown (DrawDown, DD, drawdown) in the foreign exchange market is a temporary decrease in funds in the trading account as a result of opening a losing trade.
In simple words, a drawdown is a trader's floating or real loss.

Drawdown types
In the Forex currency market, it is customary to classify the following types of drawdown:

The current drawdown is a temporary drawdown associated with an open position, which is now in the red.
The size of the initial deposit does not change until the position is closed.
As a result, the position itself can be closed even in a plus, but if the position goes into a minus, you should think about the rules of money-management.
Because a position not closed in time may end up with a margin call.

A fixed drawdown is a position closed with a loss.
This type of drawdown negatively affects the size of the deposit, reducing it.
If money management is not used correctly, such transactions can significantly reduce your deposit, which is not recommended.

Maximum drawdown - the maximum value of deposit losses for the entire trading period.
It is calculated each time from the previous maximum deposit amount, and the largest value is selected.
For example, there were three big minuses on the account: $300 with a $1000 deposit, $450 with a $2000 deposit and $200 with a $2500 deposit. The maximum drawdown here will be $450.

Relative drawdown - the maximum decrease in the account relative to the initial deposit, expressed as a percentage.
It is often used when analyzing a trading strategy in order to understand after what losses a trader should think about changing the strategy.
For example, if the relative drawdown is 20%, then with an initial deposit of $1000, the speculator will understand that it is necessary to close deals and modify tactics when the current drawdown reaches $200.
The absolute drawdown shows how much the balance has decreased relative to the initial value. These data are similar to the relative drawdown, but are expressed in the deposit currency.
Why analyze losses?
Each trader should know how much he is ready to lose and at what value he needs to change the strategy and start trading a little differently.
The percentage of allowed drawdown is different for each trader, conservative traders try to minimize the maximum drawdown, more aggressive traders take risks much more often and in large volumes.
Large companies keep the maximum loss in the region of 15-20%.

Optimal drawdown size
The optimal drawdown size varies depending on many factors: the type of strategy, the amount of the deposit, the psychology of the trader, the timeframe, and so on.

Drawdown can be divided into three types:

A drawdown of 15-20% is working and quite normal. It can be restored, and it does not make strong adjustments to the trading strategy.
A drawdown of 21-35% is a dangerous level of losses that will require a reduction in the volume of the trade and recovery can be difficult. Closer to the 30% mark, it is important to think about modifying the trading strategy and review it for errors in the risk management system.
A drawdown of 36-55% is an actual harbinger of a loss of a deposit. It is better to close orders and think about what led to such a drawdown, which was not closed forcibly earlier.

Drawdown reduction

Setting a stop loss - and its size should not exceed 5% of the total amount on the trader's account.
Optimal leverage - the use of a large amount of leverage can lead not only to drawdowns, but also to draining the trader's deposit to almost zero.
Refraining from trading in an unstable market - very often a trader, observing even the first two conditions, still manages to lose almost half of his own funds during one session. Therefore, if you have made several unsuccessful transactions in a row, then it is better to give up trading for today and do something else.
Correct assessment of probable profit - one should not be greedy when placing a take profit, its size should always correspond to the market dynamics.

conclusions
Every trader who wants to consistently earn money in the market must understand how much he is ready to lose, while the trader must do everything not to lose all his capital.
You can lose 15% per month and it will not be scary for a trader who follows a trading strategy, money management and monitor losses.
As a result, such a trader can return the lost next month.
But those who do not follow these rules, do not think about a drawdown, do not know how much they are ready to lose and how much they cannot lose, as a result, everyone loses.
Losses are inevitable, but don't let the market take everything.
Good luck!

Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I will be glad 👩