Dealing with Account Drawdown
In the simplest terms, when you have an account drawdown in the Forex market, your account’s balance is higher than the net balance of your account. It’s a slight difference in terminology, but your net balance also takes into account your open trades, and some of these may currently be operating at losses, hence why a drawdown is possible. If you were to close all of your trades at that moment, you would have a negative profit (a loss, in other words) overall, but you don’t necessarily need to do this, and that is where a drawdown becomes very interesting and presents a lot of potential.
First, you need to take into account what is manageable and what is not. If you start out with $10,000 in your account and you have a drawdown of 25 percent, you’re currently down to $7,500 in available cash. But because you have open trades still, this isn’t totally accurate, it’s just the value of your account with your current losses taken into account. However, if you can increase your current portfolio’s worth by 33 percent, you’re back to even. It might look like a slippery slope, and it truly is. But the 25 percent loss and the 33 percent gain are actually equal in dollar values in this instance: $2,500. It’s going to be tougher to gain it back since it’s a higher percentage of your account value, but it’s still very possible to do.
That’s the key with account drawdown–keeping things within the realm of possibility. Losing 50 percent of your account necessitates a 100 percent gain to recoup losses, and this is much tougher to do, obviously. For this reason, your first task is exercising precaution and minimizing losses. Next, you need to find opportunities to increase profits. Lowering your risk amount will lower your losses, but it will also lower your earnings, too. Therefore, some sort of balance is necessary where you are trading with less when the risk is higher and trading more when the odds are more favorable. The best way to do this is to accomplish some sort of grading method for your trades. This will become easier with time, but following the news and keeping track of market conditions–fundamental analysis–is going to help, too. A lot of Forex spot traders rely mostly on technical indicators, but a mixture of both will help you in a bigger fashion.
A loss isn’t a good thing, but it isn’t immediately a bad thing, either. A loss can turn around if you are patient and make the most of it. There was a reason why you opened the trade to begin with, just make sure that you aren’t chasing something that doesn’t exist. If you were wrong in your predictions, figuring this out sooner rather than later is in your best interests. Drawdowns can turn around quickly at times, and even a short term loss can end up as a long term gain just like with Toms EA. Patience is key, but so is a good eye for evaluating the future prospects of an open trade. If there’s potential, it might be worthwhile to keep the trade open a bit longer to see if you can reverse the drawdown.