This is the largest drop in account value from a previous peak. This measurement is most useful when starting as a trader because most traders at the beginning will want to ensure they protect some portion of the initial deposit against future losses.Ībsolute drawdown is normally stated as a percentage (rather than a dollar amount). It is ‘absolute’ because it always uses the initial deposit as a fixed or absolute value to measure the drawdown. For example, am I still trading according to my rules? Or am I taking emotional trades that are not part of my strategy? Types of DrawdownsĪbsolute drawdown measures by how much an account value has gone below the initial deposit. But it could also be because my skills have declined-whatever the reason, I want to investigate. This could be because market conditions have changed. If my drawdowns become more frequent or larger, it indicates my trading is not as good as it used to be. The size and frequency of drawdowns tell me about the health of my trading, even if I am profitable. You want to know the health of your trading.A smart trader once told me, “It is essential to live to fight another day.” I want to know in advance if I’m in danger of destroying my account so I can adjust my trading to prevent it from happening. When a drawdown grows too large, I can ‘crash and burn’ and destroy my account because my capital becomes too small to trade effectively. You do not want to destroy your trading account.This is also valuable knowledge if I rely on my trading for income, as I would prefer to withdraw when the account is at a high point rather than take money out when my account value is down. For example, if I know my average drawdown is two weeks long, I will not get worried if I am one week into a drawdown. Knowing your historical drawdowns will help you predict when the next one should end.There are three major reasons why understanding drawdown in Forex can help you become a better trader: Read full review Get Started Why are Drawdowns Important in Forex Trading? Traders only use the word ‘drawdown’ to mean a reduction in account value due to trading losses. However, if I have a larger series of losses than normal, drawdowns can turn from a minor occurrence to a significant event, and that’s when I need to pay attention and adjust my trading.Ī drawdown is not the same as an account withdrawal, i.e., when I transfer funds from my trading account to my bank account. Minor drawdowns are a regular part of trading life. Small drawdowns will happen regularly because losing trades will be mixed in with winning trades. A drawdown is when the account value decreases after a loss or series of losses.Īt any point, if my account value is less than its previous historical highest value, I’m technically in a state of drawdown. After a losing trade, my account value decreases. Each time there is a winning trade, my account value increases. When I place trades, some will turn into winning trades, and others will be losers.
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