Dealing With Drawdowns

Filed under: Learn Forex Trading |

 

Screen shot 2013-02-28 at 09.48.40I mentioned today in my review of my February trades that I was currently experiencing a drawdown of -9%. Dealing with drawdowns can be particularly dangerous for beginner traders, and I would like to talk you through some of these issues right now.

 

To begin with, let’s define exactly what a ‘drawdown’ is just to be clear. A drawdown is the losses taken from a relative high on your equity chart, to a relative low. So, if your trading bank was to reach +36%, and then you took some losses and it went back to 24%, then you would be carrying a -12% drawdown.

 

The largest drawdown that I have currently taken is around -16%, but some higher risk traders may find 30-40% acceptable. However, if your largest drawdown is over these levels, then you should really think about adjusting your risk levels, as you may be in danger of blowing up your trading bank.

 

The main thing that you should do when you experience a drawdown is to not panic. It is imperative that you stick to your trading plan, and trade in the same manner that you would have if you had not experienced the drawdown. That means doing all of the same things that you were doing when things were going well. If you do not do this and deviate from your trading plan, then things are likely to go from bad to worse. Do not chase losses, and do not adjust your risk levels in line with your emotions. If you have a drawdown and reduce your risk levels, then when you hit some winning trades, you will be treading water and you will not make any useful gains.

 

All in all, I would say that drawdowns have to be seen as the cost of doing forex business, and they are something that you have to come to accept if you want to be a professional forex trader.

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