Forex drawdown and ways to reduce it.

When trading Forex, no one is immune to losses. There are no strategies that are completely free of losses. In practice, a successful trade often turns into a losing one, resulting in a deposit drawdown.

A Forex drawdown is a decrease in equity resulting from losses incurred from unsuccessful trades over a certain period of time. It can be expressed as either a relative or absolute value.

Relative drawdown indicates the percentage decrease in a trader's deposit after an unsuccessful trade. For example, a trader's deposit balance was $1,000 at the beginning of the day, but by the end of the day, it was only $700. In this case, the loss would be 30% of the initial amount, or $300 in absolute terms.

Drawdown is also typically distinguished relative to the initial or maximum balance. The initial balance is the funds with which you began trading, while 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. By the end of the month, the account balance was already 6,000, meaning you made a profit of 1,000 units. However, despite this, there was a Forex drawdown relative to the maximum balance, which was 9,000 units in the middle of the month. So, you initially earned 3,000, but then lost 2,000.

The goal of any trader is to minimize financial losses, and, as we know, preventing losses in Forex is much easier than restoring your account to its previous value.

The main steps to minimize drawdowns are:

1. Setting a stop loss – its size should not exceed 5% of the total balance in the trader's account. The order is placed simultaneously with opening a new position, but never later.

2. Optimal leverage – using high leverage can lead not only to drawdowns but also to the trader's deposit being reduced to practically nothing.

3. Avoid trading in volatile markets – very often, even adhering to the first two conditions, a trader still manages to lose almost half of their funds in a single session. Therefore, if you have made several unsuccessful trades in a row, it is best to abandon trading for the day and focus on another activity.

4. Correctly assess the potential profit – don't be greedy when setting take-profits; their size should always correspond to market dynamics.

By following these few simple rules, you can almost completely eliminate drawdowns when trading on the Forex market.