If you pass along social media 1 out hundred traders have the guts to show their draw downs and draw downs are inevitable in a traders career. Do you know why?
- What are Forex Draw downs?
A draw down is the peak-to-trough decline during a specific recorded period of an investment, fund or commodity. A draw down is usually quoted as the percentage between the peak and the subsequent trough. Those tracking the entity measure from the time a retrenchment begins to when it reaches a new high.
A lot of Forex day traders find themselves blowing their accounts in periods of draw-downs
Hence risk management is very crucial to help you survive in draw-downs
If you have a draw-down that consumed 20% of your portfolio, it’s worthwhile calculating your position size again.
Know the types of draw-downs
There are two types of draw-downs:
1. Natural draw down
2. Self-inflicted draw down
Natural Draw down
There times that your strategy will not give you the accuracy you expect. Therefore in these times you must consider being careful in managing risk because the more you risk is the more you are likely to lose when you are wrong.
Traders must be able to identify the natural draw down period and hence be able cope with the situation instead of revenge trading.
This is the type of draw-down that is caused by the daily habits of the trader.
95% of the traders fail because of self-inflicted draw-down.
This is caused by
1. Greediness more often
2. Jumping into trades with incomplete setups
3. Risking more than 2% of portfolio
4. Revenge Trading
And other few to mention.
Traders If these habits are not noted in your trading journal and so as to take action will lead to blowing one account after the after sequentially.
Thus leading to give up in trading career.
The following illustration differentiates between a consistent profitable trader and a non-consistent profitable trader. Both given one month of trading.