| A Look At Draw Down In The Forex Market |
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| Written by Tom K Kearns |
| Saturday, 31 October 2009 18:22 |
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When you're looking for a third party signal provider, one of the first things that you need to look at is their maximum draw down. This is the maximum amount lost between an extreme peak and an extreme valley. This number also includes open positions but does not take into account margin required to keep you out of a margin call. Inevitably the question comes: How much draw down is too much? The answer is like many trading questions. It depends. There are a lot of factors that come into play when answering this question. Obviously a person with a 50k account could tolerate more draw down than a person with a 5k account. Another person with a 1k account could withstand even less. So aside from your account size, what else do we have to think about?
When you're looking for a third party signal provider, one of the first things that you need to look at is their maximum draw down. This is the maximum amount lost between an extreme peak and an extreme valley. This number also includes open positions but does not take into account margin required to keep you out of a margin call. Inevitably the question comes: How much draw down is too much? The answer is like many trading questions. It depends. There are a lot of factors that come into play when answering this question. Obviously a person with a 50k account could tolerate more draw down than a person with a 5k account. Another person with a 1k account could withstand even less. So aside from your account size, what else do we have to think about? You have the draw down number. How was that number derived? If the draw down number seems intolerable to you but other factors make the trader a good bet, examine the number of positions the trader opens at a single time. Say he opens 5 trades on whatever pair at one time, right away you can cut their recorded draw down by 5. If a trader's number of open trades is limited, that alone severely reduces the entire draw down figure. Sometimes you will find a trader who has a great track record aside from one major meltdown where a single trade ran out of control for days unchecked. This will produce an abnormal draw down in relation to the trader's real ability. He may be the kind of guy who can't recognize when a trade has no chance of coming back to even. He may also be a guy who lost his internet connection at an inopportune time once or twice. Either way you can keep this trader from doing this to your account by setting your own stops for him. Just make sure that you only stop out his trades that are well out of a realistic trading range. At this point, we are going to visit again our original question. Now that you have accomplished all you can to limit draw down, I will caution you by saying any amount over 35% of your total account equity is way overdoing it. If you let yourself become in a situation where a 50% plus loss is incurred, coming back from it would involve some extremely risky behavior. A 50% loss demands a 100% gain just to get back on the level. When considering draw down you should also look at how much history is available on that trader. If he only has 3 weeks of history than chances are that his largest draw down is yet to come. If he has 50 or 100 weeks of history he has probably already hit some rough patches and you can get a better idea of how rough the rough patches are for that particular trader. Do not just let go once you have selected your trader. You must constantly monitor his activity on both live and demo accounts. Should his draw down get crazy, it is undoubtedly time to reappraise your situation with him and perhaps delete him from your portfolio completely. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. To learn more about Automated Forex Trading visit Automated Forex Trading Systems. |