What Is Drawdown And Why You Should Care

Make no mistake, drawdown is a factor that can make or break any trader. When trading with robots it is a vital component of the overall success that your robot will bring you. But what is it all about and why should you care…?

Drawdown, in it’s simplest form, is the amount of money that you lose in a trade (or a series of trades).

All traders are afraid of drawdowns, but it is an inevitable and unavoidable part of trading.

Drawdown is not a measure of your trading performance because it is only calculated when you have a loss or a series of losses.

Let’s take a closer look at an example…

Let’s assume that you start with $1,000 in your trading account. After a series of losses you found that you had decreased your account balance by $200. This means that your drawdown is 20%.

Now, let’s look at another scenario. Let’s assume that after losing $200 from your original $1,000 balance, you gained $100 and then lost $300.

In this scenario, your drawdown would be:

($800 + $100) – $300 = $600 or 40% drawdown

Now, let’s take another example. Suppose you did not have a losing trade and instead made $300. Your trading account balance would now be $1,300. But what would happen if you were to now lose $200?

($1,000 + $300) – $200 = $1,100 or 15% drawdown

So, in this scenario, your drawdown would be 15%.

A drawdown total of 100% will wipe out your trading account irrespective of your past combined gains.

Now why is this important for robot traders?

Well, before you consider trading with any EA, you need to have an idea of what the expected drawdown will be.

This will help you to identify EAs that could potentially do more harm than good to your trading account. The higher the drawdown on an EA, the more dangerous it will be to trade on your account.

Before you consider acquiring a new EA you should check to see what kind of drawdown levels you can expect. If the drawdown percentages are not available or exceptionally high, you should steer clear of this robot by all means.

If you already have an EA and are not sure what kind of drawdown to expect there is a simple way to determine this. Simply run a backtest on the EA using the Strategy Tester and you will find the drawdown results on the Report tab.

In the case of drawdown you want to see a low number for a good result. It usually varies between different traders depending on their risk tolerance but a good range for conservative drawdown can normally be found between 10% and 20%. More aggressive traders may prefer as high as 30% drawdown but this can be dangerous and high drawdowns should be avoided at all times.

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