For the majority of people who are tempted to try forex trading, the main motivation is to make a profit. But pretty quickly, they realize that dealing with losses are also part of this business. So what kinds of precautions can traders take to minimize account drawdowns when your trades go against you?
Since trading currencies is an inherently volatile business, there are times when a paper profit you were hoping to bank can quickly turn into a loss. That’s just what happens in trading – there are ups and there are downs. The big question is this – what’s the most I can expect to lose if this trade goes bad?
Your answer to this question is critical to developing your trading system, and it looks at how much account drawdown you are going to be able to handle. Just to clarify, a drawdown is considered to be the total capital loss in your account from high to low after you’ve had a number of losing trades.
For example, let’s say you have made trading profits for a prolonged period of time, but your winning streak comes to an end and you have started making losses. You will obviously be concerned about how many more losing trades you will have, and how much of a drawdown you are going to have based on past experience with your trading system.
This Is The Key To Minimizing Drawdowns In Your Forex Account…
This is why back testing your trading system using a demo trading account before ever considering trading a live account is so important. Just the fact that you’ve tested things in a demo account is a great way to make sure the system you are using is likely to work in most of the market conditions you are likely to encounter.
Using this risk-free testing environment is going to let you have enough confidence in your system to enter and exit trades without hesitating. You are never going to become a profitable trader if you panic every time a trade signal is generated because you don’t have confidence that your trading system is going to work.
Trading the forex market involves risk, and that risk is always present regardless of what trading strategy you end up using. And of course, risk leads to losses. Professional traders assume that losses will happen and are unavoidable, but they can be managed by proving your trading with back-testing before you risk money in the market.
Trading can be very rewarding and exciting, or it can be frustrating and extremely expensive. Some days you experience all of these things things within just a few hours. But if you can build a forex trading system you trust through back-testing, and you force yourself follow each trade signal you receive, you’re well on your way to having profitable career trading the forex market.