I know that many people have different extents of acceptance of risk and aversion of risk.
I know that some people regard forex trading as high risk and some as investment, so I know really that there is no right answer or wrong answer for my question, but there are different opinions. If you are looking at a trading method and thinking about using it what is your acceptable level for drawdown?
If you look at 1,000(?) trades of the method, either by back testing or however you do this. What % drawdown will make you say āNo, this is too dangerous for meā? How much drawdown, in %, is ok for you?
I donāt imagine my perspective will be a representative one among retail traders, but in case itās of interest to anyone, it might be a more or less āindustry-standardā one: anything above 4% PTT drawdown - unless formally designated a āhigh-risk fundā - immediately loses the potential for any serious investment. 4% is at least a very widely, if not almost universally, accepted figure.
I have a risk-manager and position-sizing limits, like anyone, but Iād be in trouble, really, if I went anywhere near 4% drawdown of my allocated funds. Iād be pulled from my desk before that, Iām sure.
Maybe 4% isnāt only for industry trading, though: in the retail trading world, Iāve also noticed that the two leading prop-firm funders (I mean among the few real ones, who really put their money on the line to fund people who get through the evaluations, not the silly, scammy, counterparty ones who only pretend to but want their customers to fail!), both actually use a 4% loss limit, too.
Iām just getting my maybe-unpopular answer out of the way first. Iām guessing most Babypip members will have a slightly higher figure in mind. In which case theyāll be absolutely right, of course, according to their own tastes for risk acceptance.
Thereās no one size fits all. The acceptable drawdown for a each trader is going to be different depending on factors such as risk tolerance, equity, and psychology.
Now this next part may sound like Iām making a joke but Iām not.
If you want to find out where your personal drawdown comfort level is, put on an Apple watch and monitor your pulse rate while youāre in drawdown.
If your pulse gets above 100 beats per minute (tachycardia) youāre feeling discomfort from drawdown.
If your pulse gets to 120 beats per minute or higher, youāre probably near your Maximum Pain Level for drawdown.
Drawdown (DD) has to be related to your trading method and risked capital.
For example, you are using single setup. You have to find your RR. For example your RR is 1:1. Next is your trading stats. Let says from 1000 trades, you win 70%, and your max consecutive losses is 3, you can risk up to max 8%. Reason is 8% x 3 = 24%. The toughest trader usually have psychological impact around 25% drawback.
If you are a beginner, my advice for single setup, never exceed 3% at once.
Remember my statement is apply to minimal capital 100 USD for currency pair and 400 USD for XAU.
When you use multiple setup, such as averaging, 25% DD is considered common. On average the DD is 50% with minimal capital 1000 USD, XAU at least 10k USD.
You can put %s to drawdown, but when your heart is about to jump out your chest while youāre in drawdown, that is the moment of truth of what you psychologically find acceptable.
My numberās 5%, but the worst drawdown is always the one you havenāt had yet. So when I look at a maximum drawdown figure, if thereās a statistically significant number of live trades to make it worth looking at all, I take 2.5% as my cut-off number and just adapt the numbers.
You can easily adapt any figures to suit your own risk aversion.
I donāt care if the drawdownās much higher than 2.5%. If so Iāll just divide the profit by whatever number makes the biggest drawdown 2.5%. If the profitās 21% but with a 7.5% drawdown, I divide the position-size by 3 to make the drawdown 2.5%, then the profitās 7%, a third of 21%. Simple.
I decided to keep things simple when it comes to risk management and established a strict rule: I risk 1.5% of my capital per trade. Accordingly, I adjust the size of my stop-loss and take-profit levels to reflect this setup.
I am surprised. Maybe I misunderstand? You fix the position of your stop loss according to your risk capital, instead of fixing the position of your stop loss level according to what the chart shows you and after this deciding the position size according to where the stop loss must be?
For me, a drawdown of up to 20% is acceptable, but anything beyond 30% would raise serious concerns about the methodās risk-reward balance and sustainability.
I hope this not too off topic but here is a brief synopsis of parts of Tom Hougaards book -
āBEST LOSER WINSā
Tom talking to a CEO of a large London brokerage -
Tom; How can you tell if someone knows what they are doing?
CEO:1 Account size
2 Trade frequency
3 Ratio of time spent holding losing trades versus holding winning trades
4 Adding to winning trades or adding to losing trades
5 Trading with a stop loss.
I emphasised point 3, we have an important psycholgical point here. Itās human emotion to hold losses in hope of them turing good and we cut our winners short out of fear of having our money taken away.
Across the board brokers have to publish % of losing traders and itās about 80% BUT they fail to add that traders are having about 60% winning trades.
So that old adage - āCut your losses and let your winners runā is TRUE
Sorry, back to thread - My daily drawdowm as a 5min/1min trader would be 20pts Nasdaq (2%) but if I think 'oh well thatās just a losing trade ok - three such losing trades and I would consider - is it just a bad nun is the market not liking me today and not suiting my style or is it just plain me not firing on all cylinders? Either way I would pack it in for the day as these days have a bad habit off getting worse! Small losses are easy to get back but donāt let yourself get in a hole. I use a tight SL but thatās one advantage of being a scalper
In the unfortunate instance of a big drawdown over an extended period - bank/equity in account down, once 30% of bank is depleated I would start again ie reduce stake to 1%/2% of remaining bank.
Thanks for such a great post, @Johnny1974 . That will be helpful to anyone not-yet-profitable whoās willing to read it, think about it and change their habits.
Anyone whoās traded professionally, worked in the industry, or is consistently profitable will agree with all the five points made above, but even those two alone (numbers 3 and 4) are always a very reliable indicator of whoās a long-term winner and whoās a long-term loser, in this business.
People who donāt cut losses short, and especially people who even add to losers (they often like to call it ādollar cost averagingā ) arenāt trading profitably for the long term, whatever they might claim, and they tend also to be the losers least likely to be willing to re-educate themselves or to change their trading behaviours.
) arenāt trading profitably for the long term, whatever they might claim, and they tend also to be the losers least likely to be willing to re-educate themselves or to change their trading behaviours.