How Traders Can Recover From a Drawdown
How Traders Can Recover From a Drawdown
Have you suffered a loss or series of losses when trading especially in Forex and have had no luck yet in recovering from them? Losing money is the greatest fear of every trader, whether expert traders or new traders.
You are not alone. This challenge even makes it harder for beginners to partake in investing in trading. Remember, the same trading has created millionaires and turned them into billionaires.
But they still had to take and undergo the same trading risks to achieve success. Trading drawdown is one of these issues that often affect the profitability of your investment.
The information below has been tailored to give you the ultimate guide to reclaiming your account and getting back on a prosperous track. Read on to find out how you can recover from your current and future drawdowns while reducing the risk of getting others in the future.
What is a drawdown?
A drawdown, expressed in absolute monetary terms such as dollars or percentage, is a measure of your trading account's drop from peak to trough as the trends tend to fluctuate.
For example, if you invest in stocks with an initial capital of $200,000, they can either rise or drop.
If in this instance, it rises to 250,000 and then later drops to $180,000, the drawdown experienced will be ($250000-$180000=$70000) because it is moving from one specific peak to the other over a specified period.
From the description, you can already figure that you need this to be at low levels, and you will need to take measures to mitigate the impacts it can have on your trading account
Is a drawdown good or bad for your trading?
Drawdown explained you will find that it has a negative effect on you as a trader and positively influences your decision. Once you understand what is drawdown in forex, you can use it as a risk metric.
Risk management in forex trading entails studying the markets, especially volatile assets-related markets, to catch wind of how to minimize your losses and when to trade for maximum profits.
Measures traders can take for controlling the risk of a drawdown
Below are tips and tricks you can use to keep your drawdowns in check and minimize chances of getting the same in the future:
Set up a maximum drawdown level
A maximum drawdown (MDD) is the maximum peak-to-trough decline of an investment over a specific period before a new peak is attained or reached.
If you are trading in forex, for example, you can set a percentage which, if your loss exceeds, you will have to take necessary measures to avoid a more significant negative impact.
Due to the uncertainty, you can either tighten stop-losses or avoid volatile assets such as exotic currency pairs you are putting at stake.
If you set your MDD level to be 25% and the drawdown nears it, you can change your whole strategy or use the measures mentioned above depending on which best works for your account.
Sharpen your entry Strategy
For your trading to be effective, you will need to know how to increase your risk-reward ratio and implement it.
With a good entry strategy, you will have improved market timing which helps you limit losses since you can tighten your stop loss. This undertaking will enable you to evade a drawdown period even when you have lower chances of profiting.
In addition, thanks to technology, you do not have to follow up your account 24/7 to set up a stop loss. Use a dedicated forex signal provider with automatic closing points to put in place your stop loss settings.
If losses continue consistently, reduce the risk
Have you heard of the popular term in forex trading, "revenge trading"? This term refers to a trading strategy some traders use when they experience drawdown trading.
Here, as the term suggests, traders increase their risk in efforts to make back what they have lost while trading. Others maintain the same losses hoping it will take a positive turn.
Although increasing the risk sometimes works when there is a turn of event, it is essential that you acknowledge the drawdown in forex can continue to a point where it kills your account.
A more sensible approach is to observe your loss and reduce your risk per trade accordingly. This step may not solve the problem or guarantee you profits but will cushion you from the adverse impact you would have experienced had you not done so.
You can then reemploy your previous tactics once you regain a positive flow in your account with at least two wins
If all attempts to recover from loss fail, take a brief break
Do not mistake this for giving up. Most traders tend to keep pushing harder regardless of the trading drawdown and setbacks experienced which is a great quality of a trader, but sometimes the trends won’t work in your favour, and you can end up losing everything, your mind included!
Take a break of even a week, relieve your mind, and if you are new at this, do not lose hope. Keep researching forex trading for beginners, which is available online and in hard copies at libraries near you. Come up with a recovery strategy, and who knows, the conditions will probably be favourable by the time you get back on track.
Be emotionally detached
To trade effectively, avoid having emotions cloud your judgment. Yes, you are human, and trading can be frustrating. But you need always to have present measures you will take in case of downfalls to avoid problems such as overtrading.
Use logic to make your daily decisions rather than emotional attachments regardless of the drawdown's effect on you.
What is your overall takeaway from this?
It is safe to say that you are now equipped with the right tools to trade productively and that a trading drawdown is inevitable, but with the right guide, you can control the situation.
The measures to curb the situation, as you have noted, but are not limited to: having a drawdown cap in place, reducing the risk, improving your entry strategy, and keeping your long-term strategy at per so that you stay on track.
First, find which strategy works best for you, do not implement a trick you have to hear of without doing proper dive into it and figuring out whether it will have a positive outcome on your account.
Trading such as trading in stocks, commodities, or currencies is a productive investment. However, it requires you to be risk-savvy, dedicated, resilient, and pragmatic and be able to make strategy-based decisions.
It is essential that you understand, that the recovery period can be more extended than you expect, and different drawdowns have different turnarounds.
It is wise that you do not take a measure to improve a situation and expect it to improve immediately. Do not pressure yourself, and measure your profitability in terms of a series of wins and losses instead of each undertaking.
Join platforms with other forex traders to get insight into what you might be doing wrong or can do better.
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