Hello! We all do not want to receive a drawdown, and by investing in a PAMM account, the size of the drawdown - the first thing that draw attention.
On the one hand, the smaller the maximum drawdown, the better. On the other hand, the reality is that they completely avoid it is simply impossible!
On the one hand, the smaller the maximum drawdown, the better. On the other hand, the reality is that they completely avoid it is simply impossible!
What is the relative what is absolute drawdown? What should be the maximum? How to reduce it? And here psychology? All this less traveled!
What is drawdown on forex?
Drawdown (sometimes referred to as drawdown, from the English Drawdown.) - Is the reduction of funds in the account. For example, you joined the balance of 10 000 $, after a month of trading that you have a total of 9 000 $, it means that the expense has decreased by 1 000 $.
This is called subsidence, which in our example amounted to 1 000 $.
That figure, always visually understood better:
What is drawdown on forex?
Drawdown (sometimes referred to as drawdown, from the English Drawdown.) - Is the reduction of funds in the account. For example, you joined the balance of 10 000 $, after a month of trading that you have a total of 9 000 $, it means that the expense has decreased by 1 000 $.
This is called subsidence, which in our example amounted to 1 000 $.
That figure, always visually understood better:
This is a chart of the balance of the PAMM accounts, which can be clearly seen periods of subsidence, from the smallest to the greatest, lasting half a year.
What is the absolute drawdown.
Absolute drawdown - a drop in resources with respect to the initial value. For example, if you joined a deposit of 10 000 $, that means any reduction below this level will be considered the absolute drawdown. If the funds will always be greater than 10 000 $, the absolute drawdown will be zero.
If you look at the same PAMM account, the absolute drawdown was soon after its opening:
What is the absolute drawdown.
Absolute drawdown - a drop in resources with respect to the initial value. For example, if you joined a deposit of 10 000 $, that means any reduction below this level will be considered the absolute drawdown. If the funds will always be greater than 10 000 $, the absolute drawdown will be zero.
If you look at the same PAMM account, the absolute drawdown was soon after its opening:
В дальнейшем график баланса не снижался ниже начального.
What is the relative drawdown?
Relative drawdown - a reduction of funds with respect to the maximum value. Usually, it is considered as a percentage.
For example, you refill your account with $ 10 000 and within a month lost $ 2000. In this case, the relative drawdown is 20% (2 000 $ 10 000 $).
If you refill your account with $ 20 000 and within a month lost $ 2000, the relative drawdown is equal to 10% (2 000 $ 20 000 $).
This is the most common method of calculation of subsidence. The most developed service Alpari PAMM accounts calculates graphics resources in relative terms. And drawdown and profit are considered thus.
If we take for example, is the same account, the maximum relative drawdown of all time was about 23%. Although the graph score dropped to 47% (from 60% to 107%).
How did it happen? Keep in mind that 107% is a profit to the initial deposit. Therefore drawdown is considered not only for profit, but takes into account all the funds in the account (ie 100% of the initial depot + 107% of the profits). Relative drawdown is calculated by the formula 47% * 100 / (107% + 100%) = 22.70531% (approximately 23%).
The general formula for calculating the relative drawdown on this chart:
R = R1 * 100 / (D + 100);
Where R - the desired relative drawdown;
R1 - drawdown on schedule;
D - the maximum yield reached before the beginning of the drawdown.
What is the maximum allowable drawdown?
This question can not be answered accurately, as well as to the question of maximum profit. Everything depends on the trade policies and attitude to risk.
For example, for me, is the level of comfort the maximum drawdown of about 25-30%. Someone could easily sell and transfer 50-60%.
Keep in mind that no matter how well you have not tested your system, any maximum drawdown on the history can be overcome. If the tests indicate 30%, then sometime in the future and will be 35%. Consider this trade.
There is another criterion - the time. Maximum drawdown may be short-lived for the Martingale strategy, after a sharp descent there is a sharp rise (if at all). For long-term trend strategies are typical drawdown duration of several years.
Everything is very individual, depending on the particular strategy. Therefore, in evaluating your trading or trade manager, you first understand the principles of the system, and then figure out what the maximum drawdown will be adequate.
In what measure the drawdown?
The most common size of subsidence measurements are percentages. In my opinion this is the most convenient way.
Measurement in the deposit currency (eg, US dollars or Euros) for trading with a constant size of the capital.
If you periodically remove or contrary top up amount to the account, then such a way to be uninformative. Because the drawdown 5 000 $ to 000 $ 10 deposit - a 50% loss, and to deposit $ 50,000 - only 10%.
Measurement points or more some values are considered meaningless.
Drawdowns and psychology.
Drawdown - this is the most difficult time for the trader. Especially if you have a few months to get out of it can not.
The fact is, you have to something for nothing, and does not depend on (if you are trading systematically), that is, the output time of the drawdown can not affect you. The best thing to do in this situation - just follow your TC. It is not simple! Maintain motivation to enter into transactions on the rules, which do not bring results, it is difficult. But this ability to determine the professional trader.
Beginners are always drawn in such moments to change the strategy, something refined, but they do not understand the essence! Whatever your system was not, the drawdown will still be! And the best thing you can do is wait them to endure.
Aggravated by the psychological pressure of investors (if any), borrowed money or capital that you can not afford to lose. It is one of the most important principles of trading - trading with money with which you are comfortable to work with.
Does money management to reduce maximum drawdown?
Yes, if you have not used MM in your trading. There are a few money management systems, some of them are focused on maximum profit, some to minimize the risks.
For example, pyramiding is able to increase the profit strategy, but the drawdown either remain the same or increase.
Calculation of the volume of transactions on the basis of interest rate risk may increase profits and reduce drawdown. Although, I noticed that the effectiveness of this method falls into prolonged losing periods.
You can generally rely on a predetermined maximum drawdown, for example, 20%. Initially, only 1% of risk in each transaction, and in case of loss, to gradually reduce the risk of 0.9%, then 0.8%, etc. The bottom line is that the closer the drawdown comes to 20%, the lower the risk in a transaction, so the probability of its achievement decreases. If the positive dynamics of the risk must be restored to 1%.
In general, money management has at times it is more important in forex trading, why is this happening and what needs to be done from this conclusion, he said in a previous article.
At this time to finish, tried in plain language to explain the concept of maximum absolute and relative drawdown, as well as other useful points, I hope it!
The general formula for calculating the relative drawdown on this chart:
R = R1 * 100 / (D + 100);
Where R - the desired relative drawdown;
R1 - drawdown on schedule;
D - the maximum yield reached before the beginning of the drawdown.
What is the maximum allowable drawdown?
This question can not be answered accurately, as well as to the question of maximum profit. Everything depends on the trade policies and attitude to risk.
For example, for me, is the level of comfort the maximum drawdown of about 25-30%. Someone could easily sell and transfer 50-60%.
Keep in mind that no matter how well you have not tested your system, any maximum drawdown on the history can be overcome. If the tests indicate 30%, then sometime in the future and will be 35%. Consider this trade.
There is another criterion - the time. Maximum drawdown may be short-lived for the Martingale strategy, after a sharp descent there is a sharp rise (if at all). For long-term trend strategies are typical drawdown duration of several years.
Everything is very individual, depending on the particular strategy. Therefore, in evaluating your trading or trade manager, you first understand the principles of the system, and then figure out what the maximum drawdown will be adequate.
In what measure the drawdown?
The most common size of subsidence measurements are percentages. In my opinion this is the most convenient way.
Measurement in the deposit currency (eg, US dollars or Euros) for trading with a constant size of the capital.
If you periodically remove or contrary top up amount to the account, then such a way to be uninformative. Because the drawdown 5 000 $ to 000 $ 10 deposit - a 50% loss, and to deposit $ 50,000 - only 10%.
Measurement points or more some values are considered meaningless.
Drawdowns and psychology.
Drawdown - this is the most difficult time for the trader. Especially if you have a few months to get out of it can not.
The fact is, you have to something for nothing, and does not depend on (if you are trading systematically), that is, the output time of the drawdown can not affect you. The best thing to do in this situation - just follow your TC. It is not simple! Maintain motivation to enter into transactions on the rules, which do not bring results, it is difficult. But this ability to determine the professional trader.
Beginners are always drawn in such moments to change the strategy, something refined, but they do not understand the essence! Whatever your system was not, the drawdown will still be! And the best thing you can do is wait them to endure.
Aggravated by the psychological pressure of investors (if any), borrowed money or capital that you can not afford to lose. It is one of the most important principles of trading - trading with money with which you are comfortable to work with.
Does money management to reduce maximum drawdown?
Yes, if you have not used MM in your trading. There are a few money management systems, some of them are focused on maximum profit, some to minimize the risks.
For example, pyramiding is able to increase the profit strategy, but the drawdown either remain the same or increase.
Calculation of the volume of transactions on the basis of interest rate risk may increase profits and reduce drawdown. Although, I noticed that the effectiveness of this method falls into prolonged losing periods.
You can generally rely on a predetermined maximum drawdown, for example, 20%. Initially, only 1% of risk in each transaction, and in case of loss, to gradually reduce the risk of 0.9%, then 0.8%, etc. The bottom line is that the closer the drawdown comes to 20%, the lower the risk in a transaction, so the probability of its achievement decreases. If the positive dynamics of the risk must be restored to 1%.
In general, money management has at times it is more important in forex trading, why is this happening and what needs to be done from this conclusion, he said in a previous article.
At this time to finish, tried in plain language to explain the concept of maximum absolute and relative drawdown, as well as other useful points, I hope it!
Спасибо за внимание, пока!
