Investors in hedge funds and managed futures funds employ metrics to weed out managers who fail to control drawdowns. Professionals are not allowed the luxury of neurosis.
While self-examination is often a useful exercise, sometimes losses must be attributed to bad management rather than substandard indicators, like not using the correct stop-loss levels, or to unavoidable external shocks, the Black Swans of geopolitics. These are the traders who examine and re-examine the techniques they were using that generated the series of losses, imagining that if they could tweak their indicators just a little, the losses could have been avoided - and will be avoided next time. Do you widen your profit target? Trade more contracts?Įverybody in the Forex business knows at least one trader who made $500,000 in his first year and then lost 95% of it, so now he is trading with $25,000 - ten years later. No matter how much capital stake you have, the absolute loss in dollar terms is a number you need to know in order to figure out a way to dig yourself out of the hole. This is logical since we set stops and profit targets in terms of dollars. The retail trader should look at relative drawdown (percentage basis) and may also choose to look at it as absolute drawdown, meaning the number of dollars (or home currency) lost. An old rule of thumb used to be that a drawdown should not exceed 30% nor take longer than six months to recover.įor practical purposes, the non-professional trader should look at drawdowns on a currency-by-currency basis.
#Forex maximum drawdown indicator mt4 professional#
Relative drawdown, where the loss is expressed in percentage terms from the peak balance, is how professional managers are judged, as well as time to recovery from drawdown. Notice that you cannot measure a loss until it has been fully recovered, so technically you cannot say the drawdown is over until the amount recovered is $1,001.00.ĭrawdown can apply to your overall portfolio or to a single currency. You would say that your peak-to-valley drawdown was 30% and your recovery period was six months.
#Forex maximum drawdown indicator mt4 full#
It takes you six months to recover the full $1,000.00. At this point your account has reached its lowest low and after that, you start recovering what was lost. For example, you have made $1,000 trading Forex and then you take a series of losses for a total of $300.00 or 30%. Drawdown means the amount of loss taken in a position before recovery to the last highest profit.
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