Equity Curves and the Big Picture

Filed under: Learn Forex Trading |

 

In my live trade review today, I talked a little bit about equity curves and the importance of seeing the big picture. I would like to take this opportunity now to say a little bit more about equity curves, and why they are so important.

 

Keeping a careful eye on the equity curve of your trading bank is very important, so you must write down the results of all your trades as you go and create a running total of your bank. You can easily turn this data into graph form using a software package like Microsoft Excel so that you can see exactly how well you are doing. However, you must take this data in context, and you can only really do this once you have a significant amount of data to look at.

 

Figure 1.

For example, for me, January has not been the best of trading months so far. If you look at a chart of my trading for January (see Figure 1), it does not make happy ready. The chart goes down from left to right, which is exactly what we do not want, and my bank is down almost 5%. For a new trader with no further data to look at, this might seem like the end of the world and time to quit. However, if you now look at Figure 2, you will see my trading performance for the past six months. The chart goes nicely up from left to right, despite a large drawdown of 14% in the middle of the chart, which is an acceptable level of risk. The data for January is on the far right of this chart, and as you can see, it is no big deal in the overall scheme of things.

 

Figure 2.

So make sure you create an equity chart and keep an eye on it to both reassure yourself during drawdowns and to make sure that you risk levels are correct. I believe that it is essential for any successful trader.

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