Forex drawdown and ways to reduce it.

When trading Forex, no one is insured against losses; there is no way to completely avoid unprofitable strategies; in practice, a successful transaction quite often gives way to a losing one and a drawdown of the deposit occurs.

Forex drawdown - a decrease in Equity as a result of losses incurred from unsuccessful transactions over a certain period of time, can be displayed in both relative and absolute values.

The relative drawdown indicates by what percentage the trader’s deposit decreased after an unsuccessful transaction, for example, at the beginning of the day the trader’s deposit balance was $1,000, and at the end of the day the balance was only $700.

In this case, we can say that the losses amounted to 30% of the original amount or $300 in absolute terms. In addition, it is also customary to differentiate the drawdown in relation to the initial or maximum balance.

The initial balance is the funds with which you started trading, the maximum balance is the maximum amount to which you managed to increase your deposit during the analyzed period. For example , you opened an account and deposited 5,000 conventional units into it, at the end of the month the amount in the account was already 6,000, that is, a profit of 1,000 units was received.

But despite this, there was a drawdown in Forex in relation to the maximum balance, which was 9,000 units in the middle of the month. That is, it turns out that you first earned 3,000, and after 2,000 you safely lost. The task of any trader is to reduce financial losses, and, as you know, preventing losses on Forex is much easier than restoring the deposit to its previous value.

The main actions to minimize drawdowns will be:

1. Setting a stop loss - and its size should not exceed 5% of the total amount in the trader’s account.

An order is placed simultaneously with the opening of a new position, but in no case later. 2. Optimal leverage – using a large amount of leverage can lead not only to drawdowns, but also to draining the trader’s deposit to almost zero.

3. Refrain from trading in an unstable market - very often a trader, observing even the first two conditions, still manages to lose almost half of his own funds during one session.

Therefore, if you have made several unsuccessful transactions in a row, then it is better to give up trading for today and do something else. 4. Correct assessment of probable profit - you should not be greedy when setting take profit; its size should always correspond to market dynamics.

By following these few simple rules, you will be able to almost completely eliminate the occurrence of drawdowns when trading on the Forex market.