Types of Drawdowns on Forex
The ideal trading strategy, where each transaction would be closed in profit, does not exist. This is not surprising, because all events in the world are cyclical. Currency markets are no exception.
Drawdown on Forex is called changing the amount of the trader’s deposit at the end of a certain time period relative to its beginning. It is divided into types. What kinds of drawdowns are there?
During the day (week, month) the trader performs a certain number of operations with a different life cycle. Some transactions are closed a few minutes after the opening, while others can hang for days and even weeks waiting for their hour.
During this time, the financial result of the order varies from positive to negative, and sometimes this cycle is repeated more than once until the transaction is closed.
Any change in the number of funds on the trader’s trading account in the negative side of open trades is called the current drawdown. This figure is dynamic and varies during the movement of the price of a currency pair.
Absolute drawdown is the fall in the number of funds on the trading account relative to the originally invested amount. In the example above, it was $ 40. This means that during the reporting period the amount of money on the balance sheet was lower than the starting one by $ 40. To calculate the maximum drawdown, it is necessary to find the difference between the largest and the smallest amount of funds over the period under review. This figure is considered one of the most important for investors as well as for independent traders.
Relative drawdown is calculated as a percentage based on the maximum. To define it is simple. It is enough to distinguish between the maximum and minimum of funds for the period divided by the initial amount of capital (fixed on the first day of the period for which the report is generated).
It is impossible to completely avoid drawdowns in the trader’s work. It is important to control their magnitude and frequency of occurrence. In fact, you can set the number of losses in advance, this is done by placing a stop loss, it is the amount of the order that will control the number of losses. Drawdown on Forex is just an ordinary working tool that needs to be competently managed and directed to the right track.