Today I want to talk about the reduction in trade.
East it is very important because it is directly related to the possible loss of all the capital.
What is a reduction?
When trading, you can make profits and losses.
When you lose too much and the account drops significantly, this is called a drawdown.
Losses in trading are normal and should not be feared.
But you shouldn’t lose too much, less than 15-20% is considered a moderate negative value, and these losses should be controlled.
Drawdown (DrawDown, DD, drawdown) in the foreign exchange market is a temporary decrease in funds in the trading account as a result of opening a losing trade.
In simple words, a drawdown is a trader’s floating or actual loss.
Types of draws
In the Forex currency market, it is customary to classify the following types of drawdown:
The current reduction it is a temporary drawdown associated with an open position, which is now in the red.
The size of the initial deposit does not change until the position is closed.
As a result, the position itself can be closed even in the positive, but if the position falls in the negative, you need to think about the money management rules.
Because a position that is not closed on time can end up with a margin call.
a fixed reduction it is a closed position at a loss.
This type of arrangement negatively affects the size of the deposit, reducing it.
If money management is not used correctly, such transactions can significantly reduce your deposit, which is not recommended.
maximum decrease: the maximum value of deposit losses during the entire trading period.
It is calculated each time from the previous maximum deposit amount and the largest value is selected.
For example, there were three major drawbacks on the account: $300 with a $1,000 deposit, $450 with a $2,000 deposit, and $200 with a $2,500 deposit. The maximum reduction here will be $450.
relative decline: the maximum decrease in the account in relation to the initial deposit, expressed as a percentage.
It is often used when analyzing a trading strategy to understand after what losses a trader should think about in order to change the strategy.
For example, if the relative drawdown is 20%, then with an initial deposit of $1000, the speculator will understand that it is necessary to close deals and change tactics when the current drawdown reaches $200.
The absolute reduction shows how much the balance has decreased in relation to the starting value. This data is similar to the relative drawdown, but is expressed in the currency of the deposit.
Why analyze losses?
Every trader needs to know how much he is willing to lose and at what value he needs to change the strategy and start trading a little differently.
The allowable drawdown percentage is different for each trader, conservative traders try to minimize the maximum drawdown, more aggressive traders take risks much more often and in larger volumes.
Large companies keep the maximum loss in the region of 15-20%.
Optimum reduction size
The optimal withdrawal size varies depending on many factors: the type of strategy, the amount of the deposit, the psychology of the trader, the time frame, etc.
Reduction can be divided into three types:
A reduction of
It works and it’s pretty normal. It can be restored and does not make heavy adjustments to the trading strategy.
A reduction of
it is a dangerous level of losses that will require a reduction in trading volume and recovery may be difficult. Closer to the 30% mark, it is important to think about modifying the trading strategy and reviewing it for errors in the risk management system.
A reduction of
it is a real harbinger of the loss of a deposit. It is better to close orders and think about what led to such a drawdown, which was not forcibly closed earlier.
Set a stop loss, and its size should not exceed 5% of the total amount in the trader’s account.
Optimal Leverage: Using a large amount of leverage can lead not only to drawdowns, but also to drain the trader’s deposit to zero.
Refrain from trading in an unstable market – very often a trader, observing even the first two conditions, manages to lose half of their own funds during a session. So, if you have made several unsuccessful trades in a row, then it is better to stop trading for today and do something else.
Correct assessment of the probable profit: one should not be greedy when placing a profit, its size should always correspond to the market dynamics.
Every trader who wants to consistently make money in the market must understand how much he is willing to lose, while the trader must do his best not to lose all his capital.
You can lose 15% per month and it won’t scare a trader who follows a trading strategy, money management and loss tracking.
As a result, said merchant can return the next lost
As a result, such a trader can return the lost the next month.
But those who do not follow these rules, do not think about a reduction, do not know how much they are willing to lose and how much they cannot lose, as a result, everyone loses.
Losses are inevitable, but don’t let the market take it all away.
Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I’ll be happy