![]() However, by testing a system, a trader can look back ad find the largest period of losing trades - the largest losing streak - this is what would be called a MAXIMUM DRAWDOWN for a particular system, and this is what a trader should be prepared to. Will it be 8 consecutive profitable and 2 losing trades every time? Will it be 10 consecutive losing trades and then 3 profitable, and then 5 losing and then 15 profitable? It is impossible to tell in advance. What a trader cannot predict is in what sequence the profits and losses will come. This would be 50% drawdown.Īnother example: you may hear that a trading system is 80% profitable, (which would logically mean that the remaining 20% of the time will produce losses). Before trusting any particular system, a trader wants to know what is the largest loss he can face when he starts taking losses due to changes on the market that would lead to a temporary worsening of a performance of a trading system.įor example, if a trader put $5000 to trade with and later he has lost $2500. ![]() You'll see the term "drawdown" being used when describing a trading system. (Streak of losing trades or a LOSING STREAK - a period of consecutive losses with no profitable trades.) It is a measure of the largest loss that a trader's account can expect to have at any given moment or period of time. A DRAWDOWN is a percentage of an account which could be lost in the case when there is a streak of losing trades. You can see that there is a big difference between risking 2 of your account compared to risking 10 of your account on a single trade If you happened to go through a losing streak and lost only 19 trades in a row, you would’ve gone from starting with 20,000 to have only 3,002 left if you risked 10 on each trade.
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