Secrets of Reducing the DrawdownsWednesday, 19 July 2017 11:50
Drawdown is the loss of funds in Forex. There can be opened positions that reduce your sum. If the losses were closed (fixed), it means that a trader's deposit was reduced by losing deals. In the case of the unprofitable positions, a bigger balance with a few funds is displayed. There are several types of drawdowns on the Forex market:
- Current drawdown appears when the trader opens a losing trade. In this case, the deposit size remains unchanged. For example, a trader opens a $40 position, and the price starts moving in the opposite direction. If you don't close the position and wait for the price to turn, the current drawdown equals $40. The current drawdowns are a part of the trading process, and if the price turns, it will be possible not only to reduce the losses but also to get a profit as well;
- Fixed drawdown means that the trader closed a losing position. At the same time, the deposit size is reduced by the amount of such a transaction;
- Maximum drawdown is the highest value of the drawdown, determined by a trader, depending on the type of strategy used. The larger the amount of maximum drawdown is, the more risky tactic is used by a trader;
- An absolute drawdown is some losses relative to the initial amount of the deposit.
The beginners often don't cope with the drawdown liquidation, and in this case, they turn to the experienced traders. It's worth noting that there are no drawback solutions that would show a 100% efficiency. But there are several ways to solve such a situation.
The methods of reducing the drawdowns
The process of the drawdown reduces no different to the average ordinary trading. Usually, it involves three primary methods:
The Martingale method;
Averaging the positions;
Locking the transactions.
The Martingale method
This method consists of the losses compensation by opening new, bigger transactions. For example, if a losing deal was made in the amount of 25 points, the trader opens a new position of 50 points, in the opposite direction. If the new transaction also brings a loss, then the next position is opened on 100 points, and so on.
The averaging method
This method is often used along with the Martingale, but it involves the new position opened in the same direction as the losing transaction. In this case, the amount of the position remains the same. If it wins, the new transaction will yield an income equal to the lost funds, which in total will make a zero.
Locking the transactions, the trader opens positions in the opposite direction to the losing orders, with the same amount. Thus, further events won't affect the trader's financial situation. This method doesn't compensate the losses, but it helps to win time.
The methods of the drawdown reducing can both help the trader to "freeze" the unprofitable situation on the account, searching for the right decisions, or to try to get out of the way, using an aggressive trade as well. Using the second option, it's worth considering the risk increasing many times.
Also, a trader should analyze his trading strategy. If it doesn't bring a profit for a long time, or if losses appear much more often, it would be right to lock the positions and search for a more profitable strategy.