One of the most difficult obstacles all traders must learn to overcome is the dreaded drawdown. More often than not one or two losses spiral into revenge trading, over trading, “doubling down”, and many other mental errors struggling traders make. I’m a firm believer that a forex trading strategies profit potential is far outweighed by the likely max drawdown a strategy may have. Have you every known someone who makes a lot of money but they are constantly broke? Its really no different in trading. Just like in life, in trading its not about what you make, but rather, what you don’t lose/spend. Having a strategy that has relatively small drawdowns, as well as the ability to quickly recover from those drawdowns, is critical to becoming a successful forex trader! During the months of November and December 2016 we had a -8% draw down. This was the worst draw down we have had since December of 2014.
I started these month end reviews in May of 2015 and including November and December we now have 20 month end reviews. Out of those 20 months, we have had 16 profitable months, 1 break even month, and 3 losing months. Even with a consistently profitable track record we still see draw downs from time to time. I’m a firm believer that reward to risk ratios are the way to deal with the drawdowns all traders will have from time to time. By having a proper R/R ratio you are able to recover much more quickly. This also is a huge benefit to the psychological aspects of learning forex. Often traders make mental errors when the hole seems to deep to dig themselves out of. Knowing that 1 winning trade can erase two losses makes any drawdown look less daunting and helps reduce the urge to try to ‘make back’ a series of losses with over leverage revenge trading. In the video I discuss this point further, along with what you can do to analyze your own trading.
Total Compounded Gain: +320% Through December 2016
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