It all starts from risk management Strategies for Forex Robot Users. This is perhaps the most important step any trader ought to take in the forex market. This is such a natural process, since any financial market comes with its own set of risks.
And perhaps no risk is more important to manage that drawdown. Because as we will see in this article, drawdown is not merely losing money on one trade or in one position. But rather it is the accumulation of all the losses that you can sustain in a period of time across a number of trades.
So in this article we are going to take a closer look at the idea of drawdown and also how you can manage it in the best way possible with the most ideal solutions and also with the help of forex trading robots.
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What Is the Meaning of Drawdown in the Forex?
As we discussed above, drawdown is not simply losing money on trade. That would be manageable and easy enough. But drawdown is much bigger and extends beyond one or two trades.
Drawdown is the amount of money that you lose in a series of trades. This is why it is much more important than losing money just once. It is losing money multiple times.
There are different ways of calculating the drawdown for a trading account.
Normally, it is calculated based on the initial capital of the account minus the amount of money that has been lost through the series of trades that have been carried out. This is, in fact, the most common type of drawdown that is normally taken into consideration in the foreign exchange market.
But there is also another way of calculating the drawdown that encompasses the highs and lows. In this way, the drawdown can be calculated as the difference between the peak in your trading performance, and the peak of your account balance, minus the lowest point, which is otherwise known as the trough.
So trough makes up the lowest low you have registered in terms of the trading account balance. When you go on a losing streak and fall down from your highest peak to the trough, which is a clear drawdown in your account.
As an example, if you opened up an account with $5,000 and after a series of losing streaks you now have $2,000 that is a drawdown of $3,000 or otherwise a drawdown of 60%. In fact, drawdown is usually calculated in terms of percentages and not the dollar value of the loss.
Now that we know the meaning of drawdown, let us see what would make up an ideal amount of drawdown.
How Much Drawdown Is Too Much Drawdown?
The raw fact of the matter is that even if you are a highly professional and experienced trader in the forex market, going on a losing streak is not really avoidable. All traders have to experience this concept at one point or indeed more than just once. So if it is something that will happen one way or another, we need to know what the ideal percentage of drawdown is. And also what are the best ways in which you can manage drawdown?
It depends on your overall trading approach. We will discuss manual trading in this section and then focus on the automated trading approach later on in the article.
For a manual trading approach, your trading strategy should be able to provide you with a 70% win rate, which means your drawdown should not exceed 30%. This means that in general, 70% of your trades should result in profits.
But don’t worry too much about it if you go on a losing streak. As we said, it is a totally natural part of trading. Just make sure your losing streak does not exceed a certain threshold. And that it is followed by a winning streak as well, which is of course much longer.
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Are There Different Types of Drawdown in Forex
We discussed this notion a bit earlier in the form of different calculation methods for drawdown. But technically speaking, there are two major forms of drawdown.
The first one is called the absolute drawdown. This is the most basic form of drawdown which is the amount of reduction you experience after a losing streak compared with the initial capital that you deposited into your account.
The second one is known as maximum drawdown. This form of drawdown calculates the amount of loss your account experiences when it goes on a losing streak. But with the difference that the reference point is the highest peak of balance your account had ever experienced compared with the lowest point.
What Are the Best Ways to Manage Drawdown in Forex?
There are different ways that are quite optimal for managing drawdown – that is of course if you are trading manually. You know you can just leave it all to a smart bot such as the XauBot Pro and let the bot take care of things for you. But we will focus on that in the next section.
For now, let’s suppose you are a manual type of trader. In this case, you should consider the scale of your positions. This means you should not opt for a large lot size right off the bat. You can make the scale of your trading larger and larger step by step. If you are unsure about the position or the market conditions at the time, then start small and slowly make it bigger. This will give you the chance to manage losses easily.
On the other hand, you need to have a maximum drawdown limit for your account. If you do indeed go on a losing streak, then there should be an amount at which you stop trading altogether. This is known as the maximum drawdown limit. Every trader needs to set this threshold and carefully observe the losses to make sure this limit is not reached.
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Managing Drawdown with Forex Robots
Perhaps the smartest way to manage drawdown in the forex market is using forex trading robots. This is clearly the case because in this way you are automating the process of risk management.
And perhaps no automated trading tool can do it better than XauBot Pro. The reason is that this trading bot implements intelligent mechanisms run by artificial intelligence and also machine learning to observe the behavior of the market, all based on your trading capital and most importantly profit goals.
The way you can set a strategy for managing drawdown in forex with the help of XauBot Pro is that when you are first initializing the bot on MetaTrader 4 as the new expert advisor you have installed, there are various forms of drawdown for the automated trading process. This includes a hidden drawdown and also a maximum drawdown which the bot can easily calculate itself and provide you with the most optimal figures even if you don’t want to do it yourself.
Naturally, you can also input your own preference as well. As a result, the bot will stop trading when these drawdown figures are reached and in this way it provides the maximum security for your assets against trades that end in loss rather than profit.
Conclusion
Drawdown is one of the most important concepts in forex trading and it refers to the amount of loss, usually in terms of percentages, following a series of losing trades in comparison with initial capital or the highest account balance. One of the best ways to manage drawdowns is to use an automated trading strategy in the forms of forex robots. Indeed, forex robot users can turn to intelligent bots such as XauBot Pro and put their mind at ease with respect to drawdown.
