Drawdown, in forex, means the difference between your trading account’s high point and the next low point of your account balance. That difference shows the lost capital because of losing trades.
Traders will only have drawdown after they lose money on trades. For instance, a trader’s currency trading account starts with a $100,000 balance. Then, the trader has a bad trade, and witness the account’s equity drop to $95,000. The trader experiences a $5,000 drawdown.
The Lesson from a Drawdown
Drawdowns can also reflect the possibility of a trader’s long-term survivability in the system. A big drawdown will put a trader in an untenable position.
Imagine, there is a trader who has just experienced a 50% drawdown. This trader has a big task and challenge to get a 100% return on the reduced capital stake. The traders have to attain that to breakeven on the reduced-equity position.
Many fund managers suggest traders that getting 20% profit a year should be enough. Thus, whenever a trader experiences a drawdown, he or she should have had a good risk-management procedure.
Besides risk-management, a trader should also readjust his or her system whenever he or she suffers a drawdown. The trader, should never aggressively trade his way back to get a breakeven point.
Aggressively trading after a drawdown, most of the time, brings traders another loses. Since, traders will tend to be more emotional, use leverage to get his account balance back to even.
Too Much of Leverage
Using too much leverage can bring a disastrous effect, even from one single bad trade. The shortest explanation for that is because having too much leverage makes the traders become too aggressive or too confident.
Consequently, that leads to a larger loss and also an unwillingness to accept it and cut the trade.
The tips
The most important tip to avoid drawdown is by setting a predetermined stop-loss point before you enter a trade. That will limit the amount of drawdown you can get.
Besides, you need to also avoid trading based on emotion and focus on your risk-management strategy, instead. Exit the trade early to minimize the losses.
