What is Drawdown & How to Control It?
There are three major reasons why understanding drawdown in Forex can help you become a better trader:For example, if I know my average drawdown is two weeks long, I will not get worried if I am one week into a drawdown. This is also valuable knowledge if I rely on my trading for income, as I would prefer to withdraw when the account is at a high point rather than take money out when my account value is down.
Note: Drawdowns do not have to have consecutive losses. There could be wins mixed in with the losses that produce an overall drawdown. For example, I could have 2 losses followed by 1 win and 2 further losses. Together, those 5 trades can create a net drawdown.First, I take the difference between the lowest value the account has reached in its history and the initial deposit. I then calculate the difference between the two values as a percentage of the initial deposit.
In the open equity calculation, the +70 pips would be the new high point in my account value to calculate future drawdowns.
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