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 “No, this is too dangerous for me”? How much drawdown, in %, is ok for you?
I don’t imagine my perspective will be a representative one among retail traders, but in case it’s of interest to anyone, it might be a more or less “industry-standard” one: anything above 4% PTT drawdown - unless formally designated a “high-risk fund” - 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 I’d be in trouble, really, if I went anywhere near 4% drawdown of my allocated funds. I’d be pulled from my desk before that, I’m sure.
Maybe 4% isn’t only for industry trading, though: in the retail trading world, I’ve 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.
I’m just getting my maybe-unpopular answer out of the way first. I’m guessing most Babypip members will have a slightly higher figure in mind. In which case they’ll be absolutely right, of course, according to their own tastes for risk acceptance.
There’s 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 I’m making a joke but I’m 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 you’re in drawdown.
If your pulse gets above 100 beats per minute (tachycardia) you’re feeling discomfort from drawdown.
If your pulse gets to 120 beats per minute or higher, you’re 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 you’re in drawdown, that is the moment of truth of what you psychologically find acceptable.
My number’s 5%, but the worst drawdown is always the one you haven’t had yet. So when I look at a maximum drawdown figure, if there’s 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 don’t care if the drawdown’s much higher than 2.5%. If so I’ll just divide the profit by whatever number makes the biggest drawdown 2.5%. If the profit’s 21% but with a 7.5% drawdown, I divide the position-size by 3 to make the drawdown 2.5%, then the profit’s 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 method’s risk-reward balance and sustainability.
