In this article, we are going to discuss the concept of Drawdown. One of the basic concepts that you should pay attention to in managing transaction risk is Drawdown. A trader must know what a Drawdown is and how it is calculated. We know that risk management is profitable for us in the long run, but now we want to show you the other side.
What happens if you do not follow risk management rules?
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Consider the following example:
Suppose you have $ 100,000 and you lose $ 50,000. What percentage of your account have you lost?
The answer is 50%.
It wasn’t that hard.
This is what traders call Drawdown .
Drawdown is actually a reduction in a person’s capital after a series of loss-making transactions.
Drawdown is normally obtained by calculating the difference between the value of the relative capital ceiling minus the relative floor value.
Traders typically calculate this reduction as a percentage of their trading account.
Maximum earnings are called your most consecutive losses in trades.
Loss of work control
In transactions, we are always looking for a safe margin. That is why traders are looking to run the system for themselves.
Having a trading system that is 70% profitable is a very good safe margin. But just because your trading system is 70% profitable, does that mean that you will win 7 out of every 10 trades you make?
Not necessarily! How do you know which of these 100 trades you will win 70?
The answer is you do not know. You may lose the first 30 trades in a row and win the remaining 70.
You will still have a 70% profit system, but you have to ask yourself, “If you lose 30 consecutive trades, will you still be in the game?”
That is why risk management is so important. No matter what system you use, you will end up with a series of losses.
Even professional poker players who make money through poker sometimes lose the line and fall into a series of terrible losses, yet still make a profit in the end.
This is because good poker players practice risk management and know that they cannot win every single tournament they play.
In fact, they risk only a small percentage of their back-up capital in order to survive this series of losses.
That’s exactly what you need to do as a trader.
Drawdowns are part of the deal
Even the most professional Forex trader cannot claim to have two or more consecutive losses. So you need to know what a drug is and how to manage it.
The key to success in Forex trading is to have a trading plan and plan that will enable you to resist this series of losses. Part of your trading plan is having regular risk management rules.
Risk only a small percentage of your “trading capital” so that you can survive in the face of several consecutive losses.
Remember that if you follow and practice strict money management rules, you will become a casino and in the long run, “you will always win.”
In the next section, we will show what happens when you use proper risk management and what happens when you do not use it!
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