Drawdown, Maximum Drawdown and Losing Streaks

As we all know, risk management would secure our profits on long term, but what if we put risk management rules aside and advanced without it?

This is an example:

If you have $10,000 and lost $5,000, this is a 50% loss of your account.

In other words, this is a 50% drawdown.

A drawdown term can be simply understood as the decrease in the starting capital after passing through a series of losses.

It's net value can be calculated as the difference between a relative peak minus a relative drop in the capital and it's usually noted by traders as a percentage of their accounts.

Losing Streak

An edge is the what every trader always looks for while trading and its why trading systems are being developed by Forex coders. A Forex system with 70% profits over a reasonable period of time is considered providing a very good edge, but this doesn't necessarily mean that it'd win 70 trades out of every 100 as we don't know the real 100% total trades count out of which it'd win those 70%, right?

Forex DrawdownMoreover, if it would be really 70 winning trades out of 100 in count, you may also have the 30% (30 trades) loss in a row before winning the remaining 70, a very few traders are capable to stay in game throughout this apparently false predominating loss.

Here it comes, the importance of risk management. Whatever the Forex system you are using and how much experienced in Forex trading you are, a losing streak will eventually supervene, professionals yet still end up profitable.

This is as a professional trader knows how to practice risk management and well recognizes that he will not win every session he trades, beside that he risks a small percentage of his total capital, so he can survive those losing streaks.

You must do this too in you your trading. Drawdowns are an integral part of trading and a trading plan that gives you the ability to withstand those large losses periods is the main key for success in Forex trading, and having risk management rules is a chief part of that trading plan.

Be sure to risk only a small percentage of your total capital to survive your losing streaks and be certain that strict money management rules will make everything under your control and finally you will always be a winner.

Published On Mon, 2 Mar 2015

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