Learn powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade. This is a proprietary fibonacci trading method that has never been released before by Tom Strignano-An EX CHIEF BANK TRADER. Download this 1 Minute Forex Trading System FREE that makes money anytime instantly. This is such a simple system that anyone can use to make money even someone who has never traded forex before can learn how to trade with this simple forex trading system.
Discover Forex Mastery, the New M3 Forex Navigator Software and the Project X, the game changer for forex traders. Watch these preview videos just now and see how powerful this forex trading system. If you want to take your forex trading to the next level than don’t miss this system. Drawdown is simply the amount of money that you lose in a trade or a series of trade. Every trader is afraid of a drawdown, but a drawdown is an inevitable part of trading. Now a drawdown is not a measure of your trading performance as it is calculated when you have a losing trade against your new equity high or the original equity whichever is higher.
Let’s make it clear with an example. Suppose, you start with $10,000 equity in your trading capital. You lose $2,000. Your drawdown is 20%. Now, suppose, you gain $1,000 and then lose $3,000 again. In this case, your drawdown would be $8,000+$1,000-$3,000=$6,000 or 40% calculated with the original equity of $10,000.
Now, let’s suppose, you did not lose in the first go but rather was lucky and made $3,000. Now the equity in your trading account is $13,000. But now you lose $2,000. So, your drawdown would be 15%. Whatever, a drawdown of 100% will wipe out your trading account regardless of your past gains.
So how can you recover from an drawdown? Let’s use an example to make this clear as well. Suppose, you started with $10,000 equity in your account. You lost $1,000. Your drawdown is 10%. Now you need to make $1,000 over the $9,000 equity in your trading account to breakeven or in other words, you need to make 11.11% gain.
This is not scary yet. However, if you start losing over and over again soon you will go down the rabbit hole. Let’s me show you how! For a 10% equity loss, you need a profit of 11.11% just to breakeven. For a 20% equity loss, you will need a 25% profit. For a 50% drawdown, you will need a profit of 100%. Now, for an 80% equity loss, you will need a profit of 400% and for a 90% drawdown, you will need a profit of 900%.
What this shows is that while the drawdown increases arithmetically, the profit that you need to make inorder to recoup and breakeven with the loss increases geometrically. If you are dreaming of a One Big Win that is going to magically make you a millionaire overnight, then you are most probably going to get One Big Loss that will wipe your trading account. What you need to do is to follow the time tested money management rules of not risking more than 2% of your equity on a single trade to keep the drawdown under tight control.