What Is Drawdown In Forex Trading?

drawdown-definition-in-forex

Wondering what drawdown in forex trading mean? Get to know the definition and meaning of drawdown as it applies to forex trading.

This article provides an explanation on drawdown and its application in forex trading.

drawdown-in-forex-trading

Drawdown in Forex Trading Definition

Drawdown in forex is the difference between a high point in your trading account balance and the next low point of your account balance.

It indicates the lost capital a forex trader incurs when he or she participates in a loosing trade.

Simply put, drawdown is when a forex trader loses money on a trade and the actual amount lost.

For instance, assuming you enter into a trade with your account balance at $10,000. Then the trade does not go in the expected direction which makes it a loosing trade.

At the end, you check your forex trading account and your funds have dropped from the original $10,000 to $7,500. What this means is that you have experienced a drawdown of $2,500.

You see that it is just the difference between the highest amount in your trading account before you enter a trade and the lowest amount when you exit the trade.

Drawdown is not a random indicator to treat casually. It bears some significant impact in forex trading and every wise trader will take note.

Drawdown directly shows the possibility of getting any returns from a system.

It will be unwise not to close a trade that has already incurred a 50 per cent drawdown. That is high enough to beep danger!

Except if the trader is sure of getting nothing less than a 100 per cent return on his capital stake. Which is nearly impossible and unrealistic.

In the occurrence of a large drawdown, most traders resort to recovery tactics to get their trading accounts to break even.

Popular among these recovery tactics is leverage. Traders with an aggressive approach to trading will try to break even by using too much leverage.

ALSO READ: Difference Between Leverage, Margin and Risk

Others being greedy and for the supposed shame of not getting any returns from a trade make use of high leverage amounts.

Most times, no matter the recovery tactic adopted or the amount of leverage used, a bad trade seldom turns good.

A large percentage of forex traders believe a bad trade may turn good. Unfortunately, staying on a bad trade has ended the trading careers of many.

If the drawdown is increasing it is supposed to instill caution. Such a trade must be exited or discontinued to avoid incurring irrecoverable losses.

It is actually a potential risk and gamble to stay on a trade after it has incurred a drawdown of up to 50 per cent.

Stop-loss and Drawdown In Forex Trading

A stop-losss is an order, predetermined before a forex trader enters into a trade, which tells him or her to stop when the trade goes in a particular direction.

It is important to place a stop-loss order before you start trading. This is when you indicate the drawdown rate you can manage.

Stop-loss as a risk management strategy will hinder the forex trader from trading with emotions so they are able to exit trades when the need arises.

The idea behind pondering over the profitability of a trade is folly in every sense when the trade is incurring an increasing drawdown rate.

This is one trading mistake you must avoid. Trading properly and accurately is trading with zero emotions.

You ought to be strategic in your approach and make smart decisions. Always implement a stop-loss order before entering any trade.

Once the trade drawdown to the predetermined amount, exit the trade before you exhaust your entire trading account.

Recap On Drawdown In Forex Trading:

  • Trade with strategy and not emotions
  • Always have a stop-loss order before you enter any trade. Read the importance of a stop-loss order HERE
  • Exit a trade when the drawdown goes beyond what you can afford to lose

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