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A normal part of online forex trading is drawdown. It’s not often talked about because it isn’t “sexy,” but drawdown isn’t something you need to be afraid of.
Drawdown is when your trading account equity moves down in value. Forex traders want their balance to go up, so periods of declining account equity are typically feared, but they shouldn’t be because drawdown is normal.
Eliminating drawdown completely would require you to accurately & consistently pick the HIGHEST price & LOWEST price in every trend. This is almost impossible due to variation in prices, known as volatility in financial markets. Nobody on earth can accurately get the highest price & lowest price on each trend. We can get good prices, but there’s always a better price we could have got.
Close Enough for Profits
As a forex trader you can correctly guess the trend direction. If prices are likely to go up, you buy. If they are likely to go down, you sell. But once you buy/sell to open a position, it doesn’t mean prices will turn around the moment you place your order. Moments after you open your trade, a better price is often available. When this better price is available, you are experiencing DRAWDOWN…
This is ok.
Sometimes better prices are available DAYS after you opened your position, resulting in a larger drawdown. You don’t want to panic, because you still may be correct about prices going up over the longer term. You can also benefit from periods of drawdown.
Larger Profits with Drawdown?
A period of Drawdown is a windup for better profits.
Let’s look at a trade where we buy (long) 1,000 units of EUR/USD @ 1.3100. Prices expected to rise to 1.3300. Wait to 1.3300 to sell.
Look at these 3 scenarios:
Scenario #1 – No DRAWDOWN: If prices go from 1.3100 straight up to 1.3300, we make 200 pips on this trade. This is the ideal case as we won’t experience any drawdown.
Scenario #2 – Moderate Drawdown: If prices go from 1.3100 down to 1.3000, we are at 100 pips of DRAWDOWN. This is a point where some traders get nervous, start feeling sick and start to doubt what they’re doing. But there’s also an opportunity. We could buy another 1,000 units @ 1.3000. This brings our average open price to 1.3050. Now, when the price rises to 1.3300 we make 500 pips profit! This is 250 pips per 1,000 units traded.
Scenario #3 – Severs Drawdown: If prices go from 1.3100 down to 1.2900, we are at 200 pips of DRAWDOWN. This would tempt many traders to panic, but it’s also an opportunity to increase profits. If we buy another 1,000 units @ 1.2900, we make 600 pips profit when we reach our target at 1.3300. This is 300 pips profit per 1,000 units traded!
As you can see, larger drawdown gives potential for higher profits. The key is not to confuse drawdown with trend reversal. As long as you still believe you are right about trend direction, drawdown is really just a difference in timing between you & the market…a difference that can earn you higher profits.
Avoid Drawdown Denial
There are times when you should cut your losses and prevent drawdown from wiping you out. There is a point where drawdown turns into devastation. It’s a line you need to walk carefully. It’s not something to fear, it’s something you need to understand how it fits within your trading system.
With portfolio hedging, drawdown is automatically accounted for & used to grab higher profits when the drawdown turns into a huge UPSWING! To receive the benefits of a well planned money management system that uses drawdown as an advantage (and avoids drawdown as much as possible), check out the rapid forex hedge report today.
There is to be a temptation among people learning forex trading to want to feel like they understand trading before they start trading. This isn’t the best way to learn to trade.
Learn Trading by Doing
The FEAR that most people have is that when they begin trading, they don’t want to lose money. Nobody wants to lose money, we become forex traders so we can make money.
If you haven’t traded any real money yet, it seems logical to want to have a winning system in place before putting real money on the line…this is why demo trading (trading in a practice account with pretend money) is typically advocated.
The PROBLEM with Demo Trading
Demo trading is a good thing to do. It does have a major disadvantage. People tend to get bored with demo accounts. We know it’s pretend money, so we don’t take our trading seriously.
I recommend that you open a tiny trading account with REAL money. You can open an account with as little as $50. I recommend opening an account with at least $100.
Allow this account to be your “learning” account.
Although your goal will be to make money from the account, consider this first account as part of your forex trading education. Give yourself permission to trade this account even down to ZERO in order to learn forex trading.
Making Forex Trading REAL
Approximately $4 TRILLION is traded every day on the forex market. This is ALOT of money, and a huge opportunity for you to live a fantastic life & to do the kinds of things you want to do in life.
I’m recommending you start trading with real money for an important psychological reason:
If you trade with REAL money, forex trading is REAL for you.
When you start making trades that earn you $1.73, $2.11 or even $0.12 something magical will start to happen. You’ll start seeing FOREX as a REAL way to make money for you.
When you see your $100 account grow to $110, you may choose to throw in another $20. Then that $130 account will grow to $150. Then you may toss in another $50. As you see the small account grow, you’ll naturally want to invest a little more in it at a time.
Since your account is already setup, it’s easy to invest another $10, $20, $50, or more because you can simply add it to your account. If you don’t have a live forex trading account setup, you’ll tend to procrastinate.
You’ll learn lessons along the way. You’ll lose money at times. Even though you don’t want to lose money (nobody want to), you’ll also learn VALUABLE lessons from the money you lose.
Whether you take a profit or a loss from a trade, the fact that it’s REAL MONEY will spark an interest in you that simply isn’t there with a demo account.
The SOONER you can overcome fear that you’re going to lose money, the CLOSER you are to becoming a PROFITABLE forex trader. The longer you wait to open a REAL account, the longer you’re postponing your success.
Think about this honestly for a moment…“How many things have you spent $100 or more on that were pure WASTES of the money…money that you spent that doesn’t have any OPPORTUNITY of earning you an income”
After you answer that question honestly…ask yourself this question “How much is it worth to INVEST in learning this VALUABLE skill that will benefit me for life?”
By making a decision to open a real forex account and start trading NOW, you’re on the true path to opening up a tremendous new REAL opportunity for yourself.
Many times I wished I started trading earlier than I did. I’m GLAD that I trade NOW Make this commitment to START NOW and I’ll continue to show you the next step!
Standard & Poor downgraded the credit ratings of 9 European countries today. France & Austria received downgrades from AAA to AA+. For now Germany still maintains a AAA credit rating.
Other countries downgraded were Malta, Slovenia, Slovak Republic, Cyprus, Italy, Portugal and Spain. This creates an overall negative economic outlook for the Euro in the near future.
Greece is still struggling to avoid default of its debts, but there is little doubt that Greece will default in the near future.
Overall Impact on Forex Prices
The S&P downgrade caused EUR based currency pairs to close down for the week. The downgrade confirmed trader sentiment that the EUR is weakening. This downgrade didn’t really shock anyone, the writing has been on the wall.
While this announcement is evidence of a mid term downtrend, shorting the EUR short term isn’t necessarily the best course of action.
There are other issues which are being temporarily overlooked by the media. The US had it’s credit downgraded back in August. With all the attention on the EUR right now, there are news items “waiting” to happen for other countries that will surface soon.
What Does This Mean for Traders?
It can be interesting to observe announcements by countries & financial corporations, but it doesn’t tell the complete story. By the time the news gets to reporting something, the effect has typically already been reflected in the price data.
Technical Analysis prevents us from getting too caught up in what we hear in the news.
The EXCITING thing about big news stories is that it creates alot of VOLATILITY. Nobody really knows what is going to happen. The news simply reports what has just happened.
I don’t try to predict what will happen in the future as a forex trader. Volatility benefits us because we can mathematically gain an advantage from trading when there is confusion in the market. Currently there is ALOT of confusion…so there is ALOT of OPPORTUNITY.
I’ll be sharing more about how you can capture this OPPORTUNITY in upcoming blog posts, be sure you’re subscribed here so you get to learn more about how to profit from volatility.