Why Forex Trading Is So Popular
Posted in Forex on October 15th, 2006
The maximum drawdown of trading system is defined as the
greatest peak-to-valley drawdown in a trading system’s equity.
Let’s say for example that we have a trading system that reaches
a particular equity peak of $100,000. Let’s further say that two
weeks later, the trading system equity is at $80,000. In this
example, let’s say that the $80,000 equity happens to be an
equity valley. In that case, the peak-to-valley drawdown would
be $100,000-$80,000 equals $20,000. This means that the maximum
drawdown is $20,000.
So why is the maximum drawdown such an important measurement in
our evaluation of a trading system? It’s because the maximum
drawdown gives us a measure of the survivability of the trading
system. A simple measure, but a measure nonetheless. Basically,
when we look at the maximum drawdown we can say that this
maximum drawdown can happen again at any time throughout the
life of the trading system. This is particularly important when
it comes to evaluating starting account size.
As an example, let’s say that you started to trade the system
using an account funded with $10,000. Right off the bat, you can
see that this would not be prudent, because as we can see from
our maximum drawdown figure if we went into a drawdown
immediately after starting our account our account balance would
logically be wiped out.
We can see from this quick illustration that we definitely need
to fund our account with more money than enough to cover the
maximum trading system drawdown. It makes perfect sense to have
a buffer of some sort as well.
I would exercise caution, if you are looking a trading system
and the recommended account size is the exact same size as the
maximum drawdown.
The maximum drawdown is an essential measure that gives us a
better idea of what to expect when trading a particular system.
A comparison of risk versus reward is an absolute essential in
successful trading.
To Your Forex Trading Success!
From Forex Pips
