I’m what would probably considered a high(er) risk trader. My trading plan calls for placing as much as a 5% risk per trade with the average position size ringing in at about 3.75%. So for me, 5% drawdown is a single loss.
How much to get worried? Maybe in excess of a 50% drawdown. Maybe even more.
The funds dedicated to trading is money considered to be lost already…so there is really no reason to “worry” at all. With a 40% win ratio, the maths [ln(#LifetimeTrade/ln(LosingPercentage)*-1] tell you that 21 losses in a row are “normal” for such a system. So as long as the losing streak is less than 21 losses…well…it’s all within the design tolerances of the system.
Realistically, I’m resolved to the fact that my approach to trading will eventually bring about the black swan event that will take away 75% of my account balance. Before that time, there will be probably a period of time each year where the balance is reduced by 50%. In the meantime, though, the gains are large enough to justify the risk.
The secret, as far as I can tell, is to remove funds from FX completely at pre-set balance levels. This is due to the fact that big increases in balance are due to the fact that the market is moving “enough” to see big gains which are reflected in the balance sheet. This period of winning due to directional movement is inevitably followed by a period of consolidation where large losing streaks are encountered.
The ideal practice, then would be to remove funds as close to the peek of the winning streak as possible so that when the losing streak hits, it hits against a smaller account balance while you laugh it off because of the large chunk of change sitting safe in your savings account at your local bank. Since one can never know when the “peek” of the winning streak is, however, the next best thing is to just establish layers where you reduce the balance by half or more…
My own approach is to ride the roller coaster regardless of losing streaks until the balance climbs to $75,000. At this point I’ll take out $60,000 which will be there to pay for an entire year’s worth of living expenses. This nest egg extracted from the market will provide a type of mental/emotional cushion for future times of significant drawdown.
When the account grows to $120,000…I’ll extract $60,000 again. This time, however, instead of being left with $15,000 as before, there will be $60,000 in the account. In theory then, it will take less time to go from $60,000 to $240,000 than it will to go from $15,000 to $120,000.
At $240k I estract $120k. Then at $500k I extract $250. From there I just repeat this process.
Each time the account runs up, I’m always aware of the fact that the next loss could be the first in the inevitable black swan series of 21 losses in a row. Every time I extract 50% of the balance I make that inevitable super-loss have less and less meaning to my overall financial picture.
This is my approach to the market and why I consider myself to be a higher risk trader…not a high risk trader.