Dealing With Trading Account DrawdownThe effect of trading account drawdown has to be considered as part of your money management strategy. Failure to do this will likely kill your trading account. Let's assume you have a $10,000 trading account, but for one reason or another the value drops to $5,000. The result is a 50% loss, right? In order to build the account back to $10,000 you will now need to turn a 100% profit from the remaining $5,000... not an easy short term feat. The following chart shows the effect of different drawdown levels:
As you can see, it is critical to limit the effective drawdown of your trading account. No trading system is perfect and you will experience losses. The important thing to do is limit the potential loss of any single trade. Keeping your leverage low and using stop loss orders is the usual way to protect your money. Many professional traders set their maximum loss at between 1% and 3% of their account value.
A lower loss potential helps to reduce the stress which some traders feel. It's one thing to recover from a 5% loss, never mind a 20% one, or more.
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