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Forex drawdown is a decrease of an investment capital which happens as the result of multiple losing positions. These trades may alternate with profitable ones. The definition of drawdown is termed numerically as the difference between the peak and the trough of the curve of capital. To estimate a drawdown risk traders use a drawdown calculator. Let’s take a closer look at the drawdown support.
According to this technique, you should increase the volume of your position if the financial market moves to the side, which is not opposite to your trade. This technique suits strategies that based on the turn of price. The initial price movement is against an open position but then price moves to the proper direction and a trader closes the trade with profit. The drawdown support is the exact antithesis of the Maximum Favorable Excursion method. This technique increases number of contracts traded in time while a trader waits for the market reversal and closing of trades with profit.
Formulas:
When the market movement is quoted as percentage.
where:
а – is the initial amount of traded volume after a profitable trade
p1 and p2 – the measurement of the initial and final price of the market movement
X – the number of traded contracts added to the existing position if the market movement meets the criteria
М – the cost of a contract
k and k% - the market movement in percentage and absolute terms
Variables:
- The number of traded contracts added to the initial number (already existing) if the price movement meets the main criteria.
- The market movement is the opposite direction to the position in percentage and absolute terms
Example:
Let's assume that your trading capital (account) amounts to 20 000$, you are going to start trading with two contracts and you want to increase your existing position for 1 contract for 500$ if the market moves in the opposite direction to the position. Then, if the cost of the contract is 1 000$ and such a movement against your position for 500$ takes place, you are trading with 2+1=3 contracts, in case of the movement with 500$ more. That is to say 500$+500$=1000$ and you are trading with 2+1+1=4 contracts and so on until you close your position or your trading capital is enough to increase the volume of contracts.
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