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Building a Forex Strategy to Recover from A Drawdown

Dave

New member
Forex trading is one of the best options for profitable day trading in the market, but like most transactions, it is not devoid of risk either. Losing money in forex trading is just part of the game. It happens to everyone at some time or the other. But having a strong forex strategy to pull you out of the loss is what makes you a smart trader. A well-thought-out forex strategy for recovery from losses can help minimize the damage and bring you at least to the point where you started.

What is a Forex drawdown?


In forex trading, a drawdown is the highest decline in your trading account balance that you see over a given period. The drawdown is basically the difference between the highest value and the lowest value in the balance of your trading account, showing the amount of money lost by investing in losing trades. So, say you made $1000 in forex trading, and after a series of losses, your trading account balance comes down to $500, which is the lowest you have had during this period. It indicates that you have lost $500 to losing trades, and so your drawdown is 50%.

The maximum drawdown you can afford depends on your personal approach towards risk management. For traders who do not mind taking high risks, the maximum drawdown can be higher as well. But if you are a low-risk trader, even a 10% drawdown can be a lot.

If you are hitting your maximum drawdown quite often, there may be something wrong with your forex strategy that needs immediate attention.

Building a fail-proof forex strategy for recovery from drawdown


Drawdowns in forex trading are inevitable. But what is important is having a plan to bring yourself back in the game after a drawdown. You will have to reconsider your forex strategy to see what is causing these losses and how tweaking the strategy slightly can help.

The best way to revamp your forex strategy is by controlling your position size and reconsidering risk management. Here are a few ways to improve your forex strategy for faster recovery from drawdown.

Create a forex strategy with smaller risk percentages


Keeping the risk percentage smaller in your forex strategy ensures that even after a few continuous losing trades, your account balance does not hit rock bottom. If your risk percentage per trade is not more than, say, 1 to 2% of your trading account, then even 20 or 30 losing trades will not have a very huge impact on your account. You have to keep these worst-case scenarios in mind when formulating your forex strategy.

Another way to limit your risk is by setting a monthly or weekly cap on your trading. Say, if you have lost 5% of your trading account in a month, you should stop trading for a while and allow yourself some time to rethink and align your thoughts. Often traders tend to increase leverage in an attempt to recover the losses and end up losing a lot more. Restraining and taking a break, instead, can be good for you as forex trading decisions are not always logical but may be emotional as well.

Lower your position sizes for a safer forex strategy


It is often seen that after a massive drawdown, traders are afraid or skeptical to place more trades. It is natural to lose some confidence after suffering a huge loss. But that doesn’t mean you have to give up forex trading completely. To give yourself time to regain confidence and feel comfortable trading again, you can start trading smaller position sizes. This will reduce the risk you take and slowly get you out of the drawdown.

Once you start feeling confident again, you can go back to your normal trading positions.

Improve the risk to reward ratio in your forex strategy


The risk-reward ratio is a very important parameter in forex trading that can protect you from drawdowns or at least help you recover much faster. The best way to improve your risk-reward strategy is by improving your entry strategy in the first place. You need to set a strict stop loss when entering a trade to ensure that you lose small, but the chances of winning are big.

For example, say you are entering a trade with a stop loss at 50 units away from the entry. The trade has the potential to bring 300 units of profit. That means your risk to reward ratio is 1:6. So in every trade, you are risking 50 units, but a single win can nullify six losses at once. That implies even if you lose six trades in a row, you can at least get back to where you started with just one win. So, a high risk-reward ratio is a lifesaver for forex traders.

Conclusion


Forex drawdown is a very important risk metric that must be taken into consideration when creating your forex strategy in the first place. But even with careful planning, drawdowns are still possible. Do not lose hope if you have been witnessing losses. The market keeps fluctuating. Just make sure you have a plan to get out of these drawdowns before they can kill your trading account. All you need to do is play a little safe.
 
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