Losing capital is a natural thing in Forex trading. This is a risk that must be faced by traders, because trading has a High Risk, High Return nature . You run the risk of making a big profit, but in return, you also have the potential to experience an equally large loss. A trader who wants to calculate the percentage of losses he gets, needs to know in advance about Drawdown in Forex.
What is Drawdown?
According to thebalance[dot]com, Drawdown in Forex is the difference between the initial balance and the current account Equity . When your Equity balance is lower than your initial balance, it means you are in a Drawdown. For example, you start trading with a net balance of 100,000 US Dollars, then you see that your Equity balance is now 95,000 Dollars. This means, the amount of Drawdown in your Forex is 5,000 US Dollars.
In other words, Drawdown in Forex is the amount of loss (loss) that the trader currently earns compared to the initial deposit . This Drawdown amount can be calculated in the form of a percentage.
How to Keep Drawdown Low
Many traders do not realize that they have a fairly high Drawdown, because they feel they have not experienced consecutive losses . Even though the higher the Drawdown in Forex, the greater the percentage of profit that must be collected to cover these losses .
Not infrequently irrational ways are also carried out by traders who experience a large Drawdown. One of them is to take risks by increasing the lot size (Position Size). They forget the principles of Money Management and tend to trade for revenge.
This is where you need to understand the importance of keeping Drawdown low when trading. Then how? Reporting from Daily Price Action, see the following search:
1.Minimize Loss Per
Transaction
Have you ever lost 10 times in a row in trading? Try to calculate what the Drawdown percentage is in those 10 trades. If the number is above 100%, then you are in big trouble!
Make sure you set the right risk percentage limit to avoid a high Drawdown. What is the appropriate risk percentage limit? Only you can decide for yourself. Risk tolerance limits can be set in various ways, some are 2%, 5%, but also some are only 1% . If you use 1% risk percentage per trade, then if your initial balance is $100, then the maximum risk per position should not exceed $1.
2.Determine the Maximum Drawdown
Limit Per Week or Per Month
This step requires a high level of patience. So that the Drawdown in Forex does not get bigger, make a maximum weekly or monthly Drawdown limit.
For example, you plan to use a 1% Drawdown percentage limit per trade. If the Drawdown has reached 5%, then stop trading and continue again next month. If next month is too long, continue next week . While waiting, you can review whether the trading method used is correct, or the risk tolerance you set is too high.
3. If Losses Still Continue, Do This!
If losses continue,
you should reduce the risk percentage per trade, until you return to a position that you think is safe . After you are confident enough, then set the risk percentage limit to normal conditions.
You can also do a thorough evaluation of the trading results, to determine the cause of the loss. If the source of failure is the application of trading methods that are less disciplined, then you certainly need to learn to discipline yourself.
The final word
Drawdown in Forex is inevitable. You have to be able to maintain discipline and emotions so that things don't get worse. Most novice traders are ambitious for revenge in order to cover the losses experienced. But what happened, the capital even collapsed in a matter of days. In order not to experience a similar incident, from now on, always pay attention to your Drawdown level.
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One powerful way that can overcome Drawdown is to take it into account as part of managing money management as a whole.
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