Forex drawdown…no trader wants it but if you are into forex trading, you will face it.
Have you ever experienced this situation? No matter what you try, you simply cannot get out of your drawdown?
It seems like the forex market is just against you no matter what you try.
You see a really good trading setup. You take the trade. Price does not follow through, it bounces back and forth until your stop loss is hit.
Or worse case scenario is that you don’t have a stop loss in place and price just keeps going against you.
Now you are staring at a huge paper loss and you just don’t know how to get out of it.
You start believing that the forex market is rigged and may even start making up conspiracy theories that your forex broker is working against you.
Trust me, I get it because I’ve been there. I experience drawdowns too.
Many times, I bust my forex trading accounts because I cannot recover from some of the big drawdowns in my account.
In here I will talk about my experiences of having a drawdown and how I have recovered from them.
Maybe you can learn something from it.
What Is A Forex Drawdown? Definition
Now, I understand that some of you may be completely new in this forex trading business you don’t really know what forex drawdown means.
If you have a $10,000 forex trading account and you lose $5,000. What percentage of you account have you lost?
Well, the answer is 50%.
This is what traders call a drawdown.
So your drawdown is 50%.
So a drawdown by defintion is simply a reduction of your trading capital after you have some losing trades.
So how is drawdown calculated?
Well, you simply get the difference between a relative peak in your capital minus a relative trough and multiply by 100% and that is how you get a drawdown in %.
What Is A Maximum Drawdown?
A maximum drawdown (MDD) is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained.
On the chart below, you can see a $5,000 trading account suffered a $2,500 loss which is a 50% drawdown.
Then after some wins the account made a new peak at $10,000 then fell down to $8,000 after suffering some loss, a 20% drawdown.
So here’s what you have:
- the first peak to valley drawdown was 50%
- the second peak to valley drawdown was 20%.
Therefore the maximum drawdown here is 50%.
18 Losing Trades In A Row
I was in a drawdown of 18%. It happened over 2 week period. Now, 18% drawdown may not cause you to push the panic button but what can cause panic is how you reached that 18% drawdown.
No matter what trades I placed, I was losing. Day in day out, every trade I placed, was losing.
It seemed like my losing streak was not going to end.
If you were in this situation, what would you have done?
- Would you have stuck with your trading system or jump ship and start looking for another trading system to use?
- Or would you have started to increase your lot sizes for a chance to get that “one lucky trade” that will recover all the loses you suffered?
But here’s the thing though: Forex Trading Drawdowns Storms Don’t Last Forever. They’ve got to end someday…
However, I knew it would end. I knew I would pull out of it, and when I do, it would happen quickly.
And it did happen…QUICKLY!
In just 1 week of trading I managed to wipe out all my trading loses and made a lot more.
So what did I do? What happened?
Well, when it comes down is, it is all about the risk:reward.
If you make a lot more than you lose in a trade, you will always come out profitable in the end. So that’s what happened.
You Are Going To Lose In Forex (That’s A Fact!)
The forex industry is kind of spoilt. People go to forex websites and blogs and read about how much money “you can make” blah blah blah…
And guess what happens?
This breeds this ideas in our heads that ” I’m not going to lose”. Wannabe traders then have these unrealistic expectations that you can make money month after month in forex trading.
And guess what happens when you get into live trading for real?
You start losing…and if your trading loses start to get bigger and you are suffering a big drawdown, you do not make sense of it and do not realize it for what it it.
So what do you think happens?
- taking larger risks per trade
And the result always tends to end in disaster.
You see, there will be times when the forex market will go through a period of low volatility, which means price will be in range bound.
Price will not see to move much and any moves it makes in that low volatility period will be pretty erratic.
You may see a good trading setups and you’d take a trade but price does not follow through.
This causes lots of losses to lots of traders.
It is during such period that many forex traders simply dump their trading systems and start looking for the next “holy grail trading system”.
Accounts that don’t have proper risk management go to zero.
Accounts that rely on big win/loss ratios suffer tremendously.
Now, I’m not a pro trader, nor do I trade forex for a living but from my experience, at the end of a drawdown period, as long as you keep following your system and money management rules, you will make up the lost ground and propel your forex trading account to new heights.
4 Ways On How To Get Out Of Forex Drawdowns
It is simple, yet difficult, at the same time.
However, if you follow these rules you can withstand drawdowns as well.
Rule #1: Risk reward
This makes or breaks your forex trading account: you must have a positive risk reward.
What this means is this: if you lose, you need to lose small and if you win, you need to win big.
For example: Joe takes a trade and his stop loss was 42 pips away from entry.
The trade made 258 pips profit.
So his risk:reward was 1:6.
Now, if every trade, you risk around 42 pips, this win would have wiped out 6 losing trades….Just one trade! Think about it.
Which simply means that you can have more losing trades that winning trades but you will still come out on the top.
This is why risk:reward is crucial in forex trading.
Rule #2: Keep your risk below 1% of your account.
If you lose, you need to lose small.
If you risk between 1% – 2.0% of your trading account per trade then:
- 20 losing trades in a row and you’ll still be totally ok
- 40 losing trading 40 trades in a row and you’d be still fine.
Ignore this rule at your own peril. Be prepared for 40 losing trades in a row.
Sounds crazy, but you have to factor in the worst case scenario into your trading.
Rule #3: Stick with it if…
Only follow this rule if you’ve followed rules 1 and 2.
A lot of people jump ship, because they don’t understand that it is a cyclical low volatility period.
So they decide to “stay out of the market for a bit”.
The market doesn’t ring a bell when it is ready to start moving again.
If you miss that first swing then you’re giving up a good chunk of pips for the year.
None of these things are sexy, but they are vital.
Rule #4: Recognize the market condition
Learn to understand when the market is in a low volatility period.
Lower your risk to 0.5%, but don’t stay out of the market because of the reasons I just stated.
Once you do this you can happily lose, know that you are protected, and know that in a few weeks or months things will turn around.
None of this is easy. None of it is flashy.
Trading is a long term and boring thing. As it should be.
A lot of people struggle to come to terms with that reality.
After string of losses it is tempting to take profit on a winning trade quickly.
You’re CRAVING a win.
However, you must resist it and manage your trades like a Wall Street Pro.
Otherwise you won’t pull out of the drawdown.
You must manage to stay calm and only exit a trade once it gives you a huge return.
Losing trades in a row and seeing your drawdowns increase can drive your crazy. But that’s how the markets work.
You need to keep taking the trades, reduce your risk, and stick with it.
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