This page will discuss our perspective on DrawDown. You're going to see us mention that Forex trading has a 96% long term failure rate. This may be difficult to believe based on some of what you might see out there, so we want to clarify something:
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Yes, there are A LOT of people out there that make A LOT of money “in Forex”. But there are very, VERY few that are actually capable of making a sufficient living solely from their Forex Trading. Very few that if given a finite amount of money and left on their own would even be able to stay afloat let alone make a living from trading alone.
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There's a difference between "making money in Forex"
and "making money Forex trading".
There are A LOT of people that APPEAR to be successful Forex TRADERS
--You’ll usually find them with big flashy websites --Only showing wins and hiding losses --Highlighting loads of testimonials
--Restricting FaceBook comments to only show the positive ones --Bragging about how often they win --Showing off how much money they make --Showing off high end cars --Exotic locations --Being flashy --Selling their EAs or Indicators or Strategies
--Selling books / workshops on how to trade --Selling memberships to their website --Charging recurring fees instead of performance based fees --And the mother of all....selling tickets to their on-location conventions where they do any or all of the above.
9.9 times out of 10 THIS^ is how they make their money in Forex. Not from actual trading.
There's a difference between "making money in Forex" and "making money Forex trading".
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A BIG DIFFERENCE
FOREX TRADING - A MAINSTREAM "MONEY MAKING" OPP
With about $6 Trillion Dollars changing hands EVERY DAY the Forex Market DWARFS ALL of the world’s stock markets COMBINED.
Virtually all Forex trading accounts allow you to trade using LEVERAGE which means the potential to make a considerable amount of money with only a limited amount of capital is almost unlimited.
That is EXACTLY why over the years Forex trading has become a mainstream venture. A “go to” for anyone looking to make money. And rightfully so. If you want to make money then you go to where the money is.
However, and unfortunately, it is a statistical fact that about 96% of ALL Forex Traders are losing traders.
I.e.; career net earnings are in the negative / in the long term they have lost more than they've made.
That means out of every 100 people that trade Forex, only 4 actually end up with a profit in the long run.
4! Out of 100!
A 96% failure rate means that the Forex Market is FLOODED with, well, losers. That’s not meant as an insult by any means. It’s just the literal definition of what happens… they lose. They are losing traders.
And the 4% that are successful and make money Forex trading, most of them do not have the slightest interest in teaching people how to trade, or anything at all for that matter.
This means that about 99% of everything you know about Forex trading; certain opinions and viewpoints about things, comes from that 96%. The LOSING side of Forex trading.
In other words 99% of what you know about Forex Trading may not be “wrong” per se. But it HAS most likely come from losing traders telling you how you’re supposed to do things or how things are supposed to be.
You can read more about this and other insights
into the Forex market here
A perfect example of this is DrawDown and this is also why something like DrawDown has become such a terrifying thing for most. Because in an industry with a 96% failure rate, most of the widely accepted thoughts, opinions and viewpoints on DrawDown comes from losing traders.
Anybody can make money when things are easy and going according to plan. But not everyone has the knowledge and expertise to know how to get out of a difficult situation; or what to do when things go the opposite of your plans and expectations. And it’s those things that make the difference between a successful trader and an unsuccessful trader.
Many times you’ll have low to moderate DrawDown simply because the price is pulling back which is only temporary. So it comes back around and heads in your direction and all is well.
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But it’s when DrawDown levels begin to go beyond that lower level / comfort zone is when the problems begin for most traders. And the biggest reason is because they simply don’t know what’s going on.
They don’t know how far the price is going to go. Is it a trend reversal or just a larger pullback? Nor do they don’t fully understand market structure or how to read price action; why the price is doing what it’s doing.
They also don’t have a complete understanding of things like Margin / Free Margin / Margin Levels / Exposure. There may be times that require quick thinking; quick calculations; balancing your exposure if needed; coordination between different pairs that you have open trades on. You have to know exactly how much each position will gain/lose per pip and be able to keep track of it all as things are moving. Sometimes very fast.
On top of all that this usually has to be done under stressful conditions, and that’s if the trader’s not in a full blown panic by that point.
And the deeper into DrawDown you get, the better you need to be at all of this to be able to handle it. The further beyond that 25%-30% DD level the more expertise you need to handle it. That’s why 25%-30% tends to be about as high as most traders are comfortable with. Because most Forex traders do not have the expertise to handle things beyond that. And the further it goes the more difficult it is.
Since they don’t know what’s going on; why the price is doing what it’s doing or where it’s going, they usually just end up closing these trades for HUGE losses. And if you’re in 40% DrawDown and you close your trades, you just took a huge 40% loss on the account.
These are some of the reasons why DrawDown has become such a terrifying thing for most traders and why most traders share the same scale as to what level of DrawDown is “safe” and acceptable. Because beyond that level most traders simply don’t know what to do.
Another reason most traders share the same ideas on what’s “safe” is because so many people rely heavily on EAs (trading software). But EAs also end up reaching a point of no return where it’s pretty much just a one way ticket to a blown account. EAs are just mindless programs that will just keep doing what they've been doing until it eventually blows the account.
KNOWLEDGE AND EXPERTISE
For other traders, those that DO have the expertise and knowledge to handle those situations mention above and are able to do so under pressure….for these traders the thoughts and perspectives on DrawDown are much, much different.
When you have the proper knowledge and expertise there is absolutely nothing terrifying, unpredictable or uncertain about DrawDown. In fact, you can actually USE IT to your advantage.
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Instead of keeping things to a bare minimum out of fear of the unknown or of the "unpredictable", you're able to more thoroughly use all of your resources to maximize your profits because you know exactly what's going on.
When you understand market structure; price action; when you know where the price is headed; why it’s doing what it’s doing; when you know the farthest the price will pullback; when you know the boundaries of where the price will stay within; when you know the exact Dollar amount each trade will increase/decrease in value per pip of price action; when you have full control and can stop your DrawDown in its tracks at any moment...
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DrawDown is no longer a major issue or problem.
A MORE ACCURATE PERSPECTIVE ON DRAWDOWN
Imagine someone coming to you with a real estate investment opportunity and you say to them: I want to invest $100,000, BUT…I don’t want to risk more than $10k-$20k. …I want to put in $100k; I want to make money like I have $100k invested, but I don’t want to actually risk more than $10k-$20k.
How does that sound to you? What sort of response do you think you would get? They would probably look at you funny like you don’t really understand how investing works. Right?
Well, that’s essentially the same thing that’s happening when you say you don’t want your trading account to go over 10%-20% DrawDown.
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Because what is DrawDown really? It’s nothing more than actually using the money that you have in your account. Using your investment. If you are in 20% DrawDown it simply means that 20% of your total balance (investment) is currently “at risk”.
Well, that’s what investing is. Risking money to make money. You risk money by putting it “somewhere” to do “something” in the hopes of getting that money back along with more money on top of it.
Except with most investments its all or nothing. If you invest $10k then your full $10k is at risk. That’s normal and expected so no one bats an eye.
But we have reached a point in Forex trading where everyone wants to make the big bucks trading, but no one wants their investment to be at risk. Or only a very small % of it at risk.
And the truth is, when you consider most thoughts and opinions on DrawDown come from a place with a 96% failure, that all makes sense. It doesn’t make it any more reasonable. But it makes sense.
ANOTHER MISGUIDED VIEWPOINT ON DRAWDOWN
Another misguided way of looking at it is considering your DrawDown amount to be losses. For example, one common thought is: If your Drawdown is 50% you think to yourself, this is a bad thing because if I close all my trades right now then I take a huge 50% loss.
Again, coming from a place with a 96% failure rate, this makes sense because, simply put, they don’t know or understand what’s happening.
They don’t know how far the price is going to go against them; how high their DD might get or even how to stop their DD from increasing. All of this usually leads to trades being closed at a massive loss out of fear, thereby having a massive loss on the account.
But for those that DO understand what’s happening; know what the price is doing and where its going; and know how to stop the DD from increasing, this thought process doesn’t even make sense. Because yes, of course you would take a loss if you closed your trades right now. But why in the world would you do that? The idea of closing these trades while they are in DrawDown seems absurd.
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Example: It would be like if you flipped houses. You buy a house and pay for all the materials and labor that’s needed to update the house. But before even updating the house you begin thinking to yourself: oh no, this is bad. If we sold the house now we would take a huge loss.
That seems silly, right? Because yes, while that is technically true, why in the world would you do that? There’s no reason to. You know what you’re doing and what the house will be worth when you’re done so there is absolutely no reason to sell it before that and take a huge loss.
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It's the same thing with DrawDown if you understand what is happening and what WILL be happening with your trades.
You may notice logos for both 20YP & FXG. FXG is a private group that the owner of 20YP is also a part of. Both groups have the exact same accounts and trades so screenshots and charts between the two are interchangeable.
Below are two good examples of why we're not often overly concerned about our DrawDown,
even when it reaches levels that would be terrifying for most.
​The bottom line is that we know the numbers. Even on a multi-million Dollar account, we know down TO THE DOLLAR how much each position will change in value for every single pip it moves. We know the boundaries of where the price will stay within and not go beyond based on current market structure and which target areas are next.
Leading up to March 7th our DrawDown got up into the -80% to -85% range. Normally DD in that range is a one-way ticket to a blown account (by the trader that is).
The reason this wasn't a concern for us, and we even spoke to a number of members about this and explained this was because we understood what was happening; where the price was going; why it was going there; the boundaries in which the price almost certainly would not go beyond; and what the price will do once it reaches those targets. ​
This chart shows our open trades leading up to March 7th.
We were split pretty evenly between only 2 pairs: EURUSD & GBPUSD At the time the situation for both pairs was fairly similar to one another so we're just going to just use EURUSD here.
You can see where all of our open trades were (on the right side of the chart). Both BUYs and SELLs.
You can see in our Feb 28th Trade Update that we pointed out the main target area for EURUSD and stated that is where we expect the price will reverse and head back up.
Then you can see in our March 4th update that the price did indeed go right down to that target area and our SELL positions increased in value by +86% virtually overnight.
In the same March 4th update we laid out our plan: as the price went back up we would begin closing our SELLs and banking those profits while our DrawDown (which was 100% from our BUYs at this point) would decrease organically as the price heads back up.
And you can see that our plan played out perfectly. In only 3 days, by March 10th, out of those 9 BUY positions, 4 were in profit, 1 was close to break-even and the top 3 had their DD cut by about 60%.
Overall, between March 7th and March 10th, our DD went from about -85% all back down
to only about -15% to -20%. In only 3 days.
Of course during this time we opened new trades that profited along the way. But you can see how much our DD would have decreased without us even having to do anything else.
Something similar to this happened on the Legacy account at the end of March. The EA had a number of SELL trades open on USDJPY & NZDJPY but the price was going up fast and far. This meant those trades, and the acct as a whole, got deep into DrawDown.
You can see a breakdown of the entire situation below. But the key point here is that once again we weren't concerned about the DrawDown because we knew what was happening, where the price was going to and where it wasn't going to go past.
And over the next couple days as the price went back down, as expected, our DD went from about -70% to about -15% to -20%.
You can see the full update on this on our LEGACY page
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All open positions from the EA were SELLs. You can see where most of them were and how the price began shooting up past them bringing all these positions into DrawDown - signaling that we may need to manually intervene soon.
