What You Should Know About Drawdown In Trading

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If there is anything that has to do with the financial markets like crypto and forex, risk management is very important and it must not be underestimated if not you will end up losing your capital. A trader who always takes his or her risk management very seriously will end up securing his or her capital thereby making money from trading the financial markets. This post is all about a drawdown in trading.

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Drawdown

It is the desire of everyone who ventures into the crypto market to make profits, but it is not as easy as one thinks when it comes to pure trading if you do not care nor know how to manage your risk management, you may end up liquidating your capital including the profits you have earned.

Now as a trader, the process by which your trading capital is reduced after trading or losing your trade is what is known as " drawdown. i.e. drawdown in trading simply means a reduction of your trading capital after many times of losing. Let's break it down with an example.

For example, let's say you have $1,000 as your available trading capital, and after trading you lose $500, which is 50% of your capital that has gone. This means the $500 you have lost is the drawdown of your capital. Drawdown is easy to calculate, which is simply the difference between your trading capital's highest point minus your relative trough (lowest point).

As a trader, drawdown is something you should be expecting to see, as the market, must eventually move down before moving up again. The highest point that your trade reaches before it begins to decline, is simply the point at which your account had its highest value which is known as the initial peak.

The lowest point that your trade reaches before it begins to rise is known as the trough which usually begins with a new peak. At this point when you fear and cancel your trade, you will automatically experience a drawdown.

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How do I avoid drawdown in trading

The truth is drawdown is part of trading and it is something you can't run away from but can minimize it. The best way to avoid drawdown in your trading is to manage your risk and apply the trading plan (strategy) that you know how to use best. In whatever you do concerning trading the financial markets, you should always take the principles of risk management very seriously.

Using proper risk management is the best way to protect your account from liquidation. The reason why most traders keep experiencing drawdown in their capital is because their risk management is poor, and not because they are not good in trading or lack of knowledge but the use of poor risk management is the reason why.

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Disclaimer

_{In this post, we have successfully educated ourselves on what drawdown means in trading and how important risk management is. Everything that we have discussed or shared here, is slowly for educational purposes and should not be treated as investment advice in any form. Always ensure you do your research and analyze the market before investing.}

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