Good Morning everyone. I have decided to take sometime to discuss a stat which I hate dearly. “DRAWDOWN”.
Drawdown is a stat which many people use to identify “Risk” taken within an account. It is simply calculated by the % in which your account has been decreased by a closed (red) position. Here is an example.
Say you have a 1,000usd account. Your first position your losing 100usd, and you decide to close it. Your drawdown is 10%. As a 100usd loss is 10% of your account which you have loss. Of course the higher the number the more of your account you have actually loss.
Here is where focusing on the DrawDown can lead to manipulation.
Drawdown is not calculated by open positions. (As if to say if I have an open order, and I’m about to margin call. I can simply redeposit and wait for the price to come back to my entry and there will never be any record of what would of been my drawdown)
If a person has profited in his/her account. Withdraws all of his/her profit and even principle. Then decide to only wager with 10usd. If he losses his 10usd. His draw down would then be 99.9% :56:
Hedging is another form of manipulating draw down, as hedging stop the loss by opening another position in the opposite direction. :22:
I say that to say this. If your going to look into the “draw down” stat. Please look at the draw down in PIPS. Not percentage. As the draw down in pips will reveal to you how accurate his/her system truly is. Anyone who has a stop loss, or running loss of over 50 pips (for the exception of playing the news release spike) has no clue as to what he/she is doing. To lose 50 pips, or allow your position to run for a 50 pip loss means your losing more then 50% of all currency pairs daily range (except for eur/jpy) on one transaction.
The under line stat which means everything is how much have you profited or loss. Everything else is meant to trap you into investing which isn’t good at all.
GBP/NZD has a daily ATR of approx 181 at the moment, and it was 283 just over 12 months ago.
GBP/JPY has a daily ATR of approx 174 at the moment, and it was 267 in 2010.
Why would I run a stop at less than 25% of daily ATR? Why would I want to get stopped out multiple times a day when I only look at the charts once per day?
What does it matter if you let a trade retrace against you somewhat, so long as it is a profitable overall strategy?
You use the word “profitable overall”. Yet, one doesn’t know if it is profitable unless the position is closed. Your assuming that it would be. Yet, if you were to concede to less then 25% of its range. Then that would suggest your aren’t bias to the losing position. No ones intent is to lost xyz amount of pips, before they gain xyz amount of pips. An experience trader would be prepared to take the opposing trade almost right away.
Of course it will depend on what you base your entry on. If your basing it on support or resistance, or even fibs. You should always be prepared to take the reverse side of the trade. Not doing so is what causes losses over a short/long period of time. Would you be as kind enough to post your account on “myfxbook”. This way we can see what your avg drawdown per pips is?
My trading is ‘profitable overall’ because it gains me pips. I won’t be posting myfxbook because the broker I use does not support the application.
I do, however, keep excellent records.
I have no idea what ‘average drawdown per pip’ is, but I have records for all my trades that cover where they open, close, max profitable profitable position, max negative position, and then I have collated those based on each system I use.
For example the 55/20 channel system I use has 162 closed trades (2 open), is a winner 33.95% of the time, averages a gain of 73.04 pips/trade, has an average length of 11.23 days, to get there though the average trade will go up to 289.21 pips positive and 154.33 negative.
Using Channel breakout systems such as this then as a somewhat experienced trader I’m not about to take the reverse side of the trade if it doesn’t work for me straight away.
Do you actually know anything about trading, or are you just posting stuff you have read elsewhere and have (poorly - apologies if you are not a native English speaker) reworded?