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How to Control Drawdowns in Forex Trading
Written by: PaxForex analytics dept - Thursday, 26 July 2018 0 comments
The key to being a successful forex trader is coming up with a trading plan that enables you to withstand periods of large losses. The drawdown number emphasizes the level of loss you might suffer while trading your trading strategy. Drawdown becomes a serious problem though when the losses are large in proportion to the funds held in the account. If you trade in any kind of volatile market, some drawdown is inevitable. It is one of the risks associated with putting your money into financial markets.
Losing is a part of trading, which is just a fact that everyone must accept straight away. So, naturally, experiencing drawdowns is also going to be a fact of the business one must accept. Handling a drawdown really boils down to understanding that you might not be trading particularly well or that market conditions may not be conducive for your strategy and that you may need to lay off a bit. In any event, we can't be perfect and is fine as long as you recognize and acknowledge (self-awareness) the situation.
Closing out existing positions and taking a little time off will not only stop the bleeding but do your psyche wonders. Even though the losses are still there, this first step will help bring immediate relief. It can be difficult to do the first time around, but once you do it you will recognize later on when to do it sooner and thank yourself for having the discipline to walk
away and stop fighting. This is one of those times where working harder will work against you.
As a trader, you must perform a very deep analysis of your system before even consider of trading it live. You need to know the maximum historical drawdown depth, the maximum historical length, and maximum stop loss, maximum take profit, and average stop loss, average take profit, number of consecutive wins/losses. You should expect at least the maximum historical drawdown! It will come sooner or later. Adjust your risk according to the maximum drawdown you are willing to bear. For example, I’m ready to bear a 15% drawdown and stop the system when/if it reaches 25% drawdown.
Forex drawdown management is the most important part of forex trading in order to avoid losing interest in the forex market because you suffered a temporary loss. In forex, there is no system that can guarantee 100% earnings, even though there are professionals and robots who say they can do it. One of the greatest tips is to have a predetermined stop-loss point on your trade before entering. This will limit the amount of any drawdown you will take. You'll be able to stand back after you've entered the trade, knowing that you're out of it with no questions asked when and if the level is hit.