Max Drawdown Management
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Thread: Max Drawdown Management

  1. #1
    Trader ara's Avatar
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    Max Drawdown Management

    Hallo traders, I will share about max drawdown management, here I will talking my way about how to set the "max drawdown" in accordance with our wishes. How can? Yes of course we can, but this is just a plan, nobody knows about the results, we can only make a plan, in fact we will not know about the results of our trading because no one knows the future about the condition of the currency and economy of a country, people can only analyze and make predictions.

    "This is purely my idea, you can take it or ignore it, it is up to you."

    I'm sure you already know about what is drawdown in forex trading. Especially if you are a manager, or at least you have a copyfx trading account. Then you should not ignore the max drawdown of your account. Because big investors will make max drawdown as a material for evaluation before following you or investing in you. No matter how big your total profit, they will be afraid to invest in you if your max drawdown is creepy. Except for smart investors, they will create an account with a small balance, then invest in you, they hope you can double their money quickly but they are willing to lose their small balance in those account.

    Definition of drawdown

    I just take a short deifinition taken from a website.

    "A drawdown is the reduction of one’s capital after a series of losing trades."

    Consider this example:
    Let’s say you have a $1,000 and you lose $500. What percentage of your account have you lost? The answer is 50%.
    Simple enough. This is what traders call a drawdown.

    abc.png

    In simple words, drawdown is the distance between peak and trough

    Max Drawdown
    Max drawdown is your highest drawdown in a certain period of time or all the times of your trading history.

    2018-07-03_123930.png

    2 types of drawdown based on your trading style

    I divide 2 types of drawdown according to your trading style :

    1. Drawdown in trading without stop loss.

    This means that if you are trading without using stop loss, whether you use a hedging strategy or not, if you lose some of your equity because of holding your loss position (in floating), then this is called a drawdown.

    The graph of trading history will be like this:

    2018-07-03_123942.png

    We will see 2 lines:
    Blue line is balance
    Green line is equity

    If the equity line is below the balance line, then it is a drawdown. The larger the distance of these two lines, the higher the drawdown. There are space between equity line and balance line when we get max drawdown because we don't use stop loss so our our trading balance are not reduced.

    *I don't want to discuss about this type of drawdown in this thread

    2. Drawdown in trading with stop loss.

    This mean that you are using stop loss in your trading, your loss is your drawdown, and your loss streak is your drawdown. The more loss in streak (fixed lotsize, TP, and SL), the bigger the drawdown.

    The graph of trading history will be like this (Let's say) :

    2018-07-03_122825.png

    It seems there are space between equity line and balance line whenever we got max drawdown. Because the balance is always cut or reduced when we get a stop loss.

    Losing streak is the cause of max drawdown

    In trading, we are always looking for an edge. That is the whole reason why traders develop systems. A trading system that is 60% profitable sounds like a very good edge to have. But just because your trading system is 60% profitable, does that mean for every 100 trades you make, you will win 6 out of every 10? Not necessarily! How do you know which 60 out of those 100 trades will be winners? The answer is that you don’t. You could lose the first 40 trades in a row and win the remaining 60. That would still give you a 60% profitable system, but you have to ask yourself, “Would you still be in the game if you lost 40 trades in a row?”

    This is why risk management is so important. No matter what system you use, you will eventually have a losing streak.

    "This is what you must do as a trader"

    HOW TO SET YOUR MAX DROWDOWN ? (TIPS)

    Normally max drawdown is displayed as a percentage, although sometimes there is a display in the form of money (equity), in general is in percentage form.

    Then how to set our drawdown according to our wishes?
    1. Test your trading strategy, you can do a back test or forward test, its up to you. You can read my other thread here if you want to do a backtest. Test for 100 trades, record the result, suppose you get 70 win trades and 30 loss trades. It mean you have 70% winning rate.

    Your 30 loss trades can be your max drawdown if you get 30 loss streak on your initial trades.
    Suppose you are risking 1% of your total balance per trades, then :
    Your max drawdown might : (30 trades / 100 trades) x 1% = 30%
    Your total profit (in 100 trades) might : (70 trades / 100 trades) x 1% = 70% from your initial balance (fixed lot size)

    2. Reduce or raise your max drawdown according to your wishes.
    NOTE : This will affect your profit gained as well, if you reduce the max drawdown then your total profit will decrease as well. If you raise max drawdown then your total profit will increase as well.

    Suppose you want to reduce your max drawdown into 15%, then you should reduce your lot size per trades (risk per trades).
    (15% / 30%) x 1 % = 0.5% risk per trade
    Your profit (in 100 trades) will decrease : (70 trades / 100 trades) x 0.5% = 35% from your initial balance (fixed lot size)

    Now if you want to increase your profit become 210 % in 100 trades. Then your max drawdown will increase as well.
    (210% / 70%) x 30% = 90 % max drawdown, near to margin call/ stop out (using high leverage).

    What is the key? The key is lot size.

    It is a simple way to manage "max drawdown" for our trading account. If you have any other ideas .... let's discuss ...
    Best of luck

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  2. #2
    Trader ara's Avatar
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    Plan your losing streak

    No matter what trading system you've used, you can get losing streak. Even professional traders can experience losing streak, but ultimately they still get profit as accumulated because they use the right financial management. In every transaction, they will only use a fraction of their capital as a risk, so that despite their losing streak they can survive. Drawdown is an unavoidable reality. The key to a forex trader's success lies in the application of a trading plan that enables him to survive despite losing streaks, and risk management is part of a trading plan that must be done in a disciplined manner.

    As I discussed earlier, we should know the result of backtest or forward test of our trading system in order to get loss rate of our trading system. Then we can manage our drawdown by using loss rate data (as I've already mentioned above). This applies to those of you who want to manage your drawdown professionally, unless you don't care about it.

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    Trader ara's Avatar
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    Let's forget our profit, but remember our loss

    I know there are many newbies who feel proud of the profit they get in just one night, it is a common thing because it is a natural thing. But do you remember that the possibility for profit and loss in forex trading without analysis is fifty fifty? You can let your child or your baby or your little sister to trade forex, I'll bet that they can make a big profit in just one night. So it is a common thing in forex trading. Just forget about profit, but always remember about risk, if we have many failures, then we must remind, if we get a lot of loss, then we must remember it for our next trade. Drawdown is about loss in streak, so we should not underestimate about this, because the drawdown is crucial to judge how well our trading quality is.

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    Trader famousfx's Avatar
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    Thanks for all this information and teaching, traders need to be evaluating all his activities in trading to know all the progress he is making, the success of one day is not what we can capitalize upon to evaluate our success in the market but the consistence profit making with strategy that maximized and minimized profit.

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  5. #5
    Trader ara's Avatar
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    Quote Originally Posted by famousfx View Post
    Thanks for all this information and teaching, traders need to be evaluating all his activities in trading to know all the progress he is making, the success of one day is not what we can capitalize upon to evaluate our success in the market but the consistence profit making with strategy that maximized and minimized profit.
    You're welcome dear, and thanks again. I am not teaching, just sharing from my own experience, I totally agree with everything you say on comment.

    I think it's important to note, I don't know how many times I say this but I think it's important to remember, drawdowns are describing our worst situation in trading activities, drawdowns illustrate how the quality of our skills in dealing with the worst situation when managing a trading account . This condition involves all factors, and the greatest effect is on our psychological factors. Don't judge a trader's skills based on the profit earned, but must be based on how he faced the drawdown until Break Even Point.

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    Hello ara, and how are you doing today. I have taken my time to go through your new thread on draw-down, and i think that it is a topic that should be taken seriously by every trader because most time we get careless when trading the market and we allow the market to take too much from our trading account before we begin to look for what to do to salvage our trading account. As for me, i always like to define my exit point well before a trade looking based on the strength of my trading capital and i do not always permit more than 50 pips maximum, because i believe that taking too much risk is not a good way of trading the market.

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  7. #7
    Trader ara's Avatar
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    Quote Originally Posted by glory3 View Post
    Hello ara, and how are you doing today. I have taken my time to go through your new thread on draw-down, and i think that it is a topic that should be taken seriously by every trader because most time we get careless when trading the market and we allow the market to take too much from our trading account before we begin to look for what to do to salvage our trading account. As for me, i always like to define my exit point well before a trade looking based on the strength of my trading capital and i do not always permit more than 50 pips maximum, because i believe that taking too much risk is not a good way of trading the market.
    hallo glory, I'm fine, Thank you. And you? Ah ... I think you are also fine, I hope you always fine.

    Maybe if we used a personal account (not a manager account / RAMM / PAMM / Copy trade) then we don't need to take this too seriously (maybe). But still, drawdown is a measure of the quality of risk management and our trading system, it will also directly affect our psychological condition.

    And if we are a manager or a trader of copyfx/ramm account, we should take it very seriously because investors will see the drawdown as one of the considerations for them in deciding to invest or subscribe / follow.

    Thanks for your opinion, best of luck dear.

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    Last edited by ara; 07-21-2018 at 01:54 PM. Reason: add quote

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    That is very correct ara, every investor will like to invest his money in a safe hand because we all know that money is one of the things in life that is very hard to come by.I have never used the COPYFX/PAMM/RAMM account before, but i have friends around me who are doing very fine in them and i know how meticulous they are in guiding their draw down since it speaks volume for them in the face of investors. I think we are into a very good business if only we can be a little careful and guide each step we take as forex traders. I have a great plan for this business and i am trying each day to see how i can improve in my performance so as to make something great from the business. As a matter of fact i am thinking of turning a full time financial trader as soon as i have the required capital . I hope you have such great plan too? wishing you all the best in all your endeavors and say me well to all your loved ones.CHEERS!

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    This is really a good idea for every trader I think because planning in this market plays a vital role in the success of a trader. If a trader plan about his drawdown then he will do trade with proper money management and also check his risk-reward ratio before opening a trade.

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    Quote Originally Posted by letsdo View Post
    This is really a good idea for every trader I think because planning in this market plays a vital role in the success of a trader. If a trader plan about his drawdown then he will do trade with proper money management and also check his risk-reward ratio before opening a trade.
    downdrawn is the most bad situation and i really got this situation a lot of time, i really lost moeny many time and the reason was just a big lot size, my analysis was almost good, i earn from many orders but lose from one, and that order just give me loss and come back after some more pips so i just found reason of loss my lot size

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