Setback in the Results Curve and Maximum Difference Explained

So now we know that Risk Management will make us money in the long run, but now we would like to show you the other side of the matter. What if you didn’t use risk management standards?

Consider this example:

Let’s say you have $ 100,000 and you lose $ 50,000. What percentage of your account have you lost?

The answer is 50%.

Very simple.

This is what brokers call a retracement in the results curve, commonly known as a drawdown.

A drawdown is the reduction of our capital after a series of transactions with losses. It is usually calculated by obtaining the difference between a relative peak minus a relative point. Brokers typically express it as a percentage of their brokerage account.

Losing streak

In stock trading, we are always on the sidelines. That is why brokers develop a system. A securities investment system that is 70% profitable sounds like a very good one. But just because an investment system is 70% profitable, does it mean that for every 100 transactions, you will win 7 out of 10?

Losing streak

Not necessarily! How do you know which 70 of those 100 transactions will be winners?

The answer is that you don’t know. You could lose in the first transactions and then win in the next 70- That would still give you a 70% profitable system, but you must ask yourself, would you stay in the game if you lost in 30 transactions in a row?

This is why risk management is so important. No matter which System you use, eventually you are going to have a losing streak. Even professional poker players who make a living by playing, fall on horrible losing streaks, and still remain profitable.

The reason is that good poker players apply Risk Management because they know that they are not going to win every tournament they participate in. Instead, they only risk a small percentage of their total bankroll so that they can survive losing streaks.

This is what you should do as a broker. Drawdowns are part of securities transactions. The key to being a successful Forex broker is having an investment plan that allows you to withstand those periods of losses. And part of your trading plan is having risk management rules.

Only risk a small percentage of your funds to trade, so that you can survive losing streaks. Remember that if you practice strict rules for money management, you will become the casino and in the short term “you will always win”

Leave a Reply

Your email address will not be published. Required fields are marked *