What is a reasonable drawdown?

I'm in the process of building a system, and I'm wondering what type of drawdown is considered reasonable and smart. Any ideas? 5%? 10%? 20%? Obviously the less the better, but what is expected from a solid system?

What are your goals in terms of drawdown. Who is this system tailored for? 20% Drawdown, even 40% drawdown may be acceptable to some if that translates to a potential for much greater return, for others, anything over 10% may be too much or too risky. Dont try to force a drawdown number into your system, see what drawdown happens to be historically(Under various market conditions - without optimizing for each) for your system and market it that way. Then you can allocate accordingly to various systems based on risk and return estimates.

For me, 10% is the max daily drawdown, and 10% is daily target. Do it make sense?

Another thing you should really keep in mind is how optimized is your system? If your system is too optimized it may show drawdowns at what you would say is acceptable...Say 20%, hypothetically, in reality since your strategy is optimized it may actually be more like 30%. Just something to keep in mind.

I trade one micro lot per thousand dollars or one mini lot per ten thousand. If I feel confident, disciplined, and I restrain myself from taking too many highly correlated trades I bump my trading up to two micro lots per thousand.

I set a maximum limit of ten trades open at one time, though if my trades are going well I only have three or four trades on at a time. My profit target is 100 pips.

I am a trend trader which means once I identify a trend I will not get out of a trade until the trend changes so my stop losses are manual and they vary widely. I spend a lot of time in front of the computer so I can afford the luxury of not setting stop losses. Trading strategies become very personalized so I don't recommend following my advice on when to exit.

I will say, though, if your looking for a method that is very low stress and you have ten to twenty thousand dollars in capital everything from paragraph one and two works very nicely. In response to the forum topic I know things are not going well if I am two hundred dollars down per thousand, so my answer is twenty percent.

With this strategy I enter the market whenever I feel like it. I am starting to experiment with entrances using moving averages and my work is starting to look promising. I will say that technical analysis works a lot better once you understand the fundamental drivers that cause people to buy and sell currency (i.e. interest rates, trade balance, current account, foreign reserves, aud/nzd trades higher when traders are risk tolerant, chf trades higher during times of market turmoil, eur trades higher when oil and gold makes major moves upwards- tied to inflation).

A fantastic book for learning trend trading is Trend Following: How Great Traders Make Millions in Up or Down Markets and Jack Schwagers book called Market Wizards.

You're going to have to explain your point. I'm not sure I understand what you mean by my system being optimized.

I assume what you're saying is if you lose 10% of your account in a day then you stop trading on the day. What if you have 2-5 days like that? Are you willing to lose 20-50% of your account and keep on plugging away on the system?

I'm building a scalping system. I think the way I want to determine my mm is to figure out the probability of how many trades I'd lose in a row. Would I be able to withstand losing 10/20/30/40 trades in a row? I'm not exactly sure what my system will do, but it's worth considering.

I was wondering what everyone else finds reasonable drawdown. If 20-30% is common then I'm in a pretty good spot.

This is the right track to go down. You have to know what is possible with your system before you can determine how many losses can occur. However, bear in mind that whatever number you come up with, the possibility is extremely good that you'll exceed it in the not too distant future.

I just read a great interview that someone posted here recently. A large trader was joking how in his office they hear "We haven't had a Sigma 9 event in 3 months!". What this means is that by definition an event out to the 9th Standard Deviation shouldn't even occur in your lifetime, yet they happen all the time in trading.

Personally, I just went through a drawdown of 6 straight losses, a very small win and another loss. I lost just over 10% and this was over a month. If I had been risking even 3% per trade, I would have been in pretty good hole. As it was, I decreased my risk as the drawdown continued, it's what kept me in good shape. You should have a plan for the same event happening because it will happen.

I made it all back and then more in the next three trades. The first win was small, but I stepped back up on the next trade, then even more on the third. I won the fourth and now I'm way ahead on the year. But now that I've seen the worst losing streak to date, I now have to always prepared for it happening again. Because it will.

Good post. How did you determine your mm before going through the streak though? Before that, your biggest streak may have been only 4-5 losses.

Also, at what point do you say, 'I understand this could happen, but it's unlikely and I'll still be better off risking to survive the probable scenarios,'? We would be much better off if the risk/mm on the system raised our account from 1000 to 10,000 and dropped back down to 7000 than a conservative system that raised our account from 1000 to 6000 and back down to 5400.

The first system experienced 30% draw down, while the other only 10%. Is the question really then, not if we can stomach the draw down, but if the system can survive? Which would leave me to believe that a system which can draw down even 50%, but compound the account rapidly is the most profitable. Does that sound right?

I think I'm opening a whole new can of worms with that thought.

Experience. I once lost a huge amount in one day, it was all of three month's profits and then 26% of my capital. It was the largest loss I've ever had because it tore me up so much I swore I'd never let it happen again and I haven't. Therefore, I can easily calculate my "uncle" point. Everyone has a different point, of course. You can only find yours through taking a big hit.

As for the losses, I haven't taken 4 losses in a row for over a year and then I hit 7 out of 8. You just never know when this shit is going to happen.


When you say "we would be much better off risking..." you're talking about your perspective. From my perspective 50% a year is great money. I'm currently up just about 40% for the year and I'm tickled pink. I'd bet you wouldn't want to spend a year only making 50%. Therefore only you can make that decision. It's not a logical one per se because it depends on what you want.

As for your example above, the first scenario encounters a 30% drawdown while the second only sees a 10% dd. I'd take the second any day simply because if a system that was traded over a significant amount of time and trades would give me a 30% dd, then I know someday it's going to encounter a much larger one. The second system with the 10% dd will see a larger one as well, maybe out to 30%. But what happens when the 30% one hits 60%? Theoretical is fine, but try sticking to your system when you've just lost 50% of your capital. When I was down 10% after 8 trades I didn't have any problems taking the 9th trade. But I bet I would if I had been down 50%. The problem is too many folks rely too heavily on the theory when it's the reality that kicks your ass.




You have this totally backwards. It is always about whether you can stomach the dd. The system doesn't trade itself, even if it were an automated system, you can still pull the plug on it once it hits too large of a dd. You've heard the saying that you can prove anything you want with statistics? That's as true with trading as anything else. These forums are full of posts by new traders who are enamored with the numbers. "If I only make 10 pips a day...". The reality is they can't and don't make 10 pips everyday. The reality is that their nice little Excel sheets that work out compounding have no effect whatsoever on successful trading. It's all about what you can do as a trader. If you can successfully execute your system to the letter once you've hit a 50% dd, then you're destined to be a successful trader in all likelihood. But I'd say the odds are against that happening.

So, if you don't want to find yourself in a deep hole, you just don't dig one. It's actually pretty simple.

I trade GJ for 100+ pips a day in 1 single trade and my SL is always 30 pips.

For me if there is a possibility of SL being hit then it was never a good trade, it has to be accurate or just never bother to open the trade.

Sitting on the fence and flirting is more enjoyable

What is your success rate? Why i ask this is because in any trade the possibilty of sl being hit is always 50%. Unless you have a 100% success rate. Although you are a professional trader, i dare say there are many more with many many years of experience who will agree that the next trade has only 50% chance of success.

I would suggest that no more than 5% is best and for sure no more than 10% for a draw down. It is easier to recover from a 10% draw down than it is a 25%. You can make up the 10% in a couple of good trades. But you have to over come some emotional baggage when the draw down gets down to 25%.

By trading a demo account you will see how difficult it is to recover from a large loss. When you have a draw down of 10% in your live account it can help to do some extra demo trading to get your advantage back in shape

As a beginning trader on a demo account, I suffered a 30% drawdown slowly with lots of little roughly 2% losses. I have now built the initially $25,000 demo account back up to $22,500. The changes I made was to start using stop losses with the pyramiding and calculating, working out exactly when to enter the next adding to profits trade as so to limit overall risk to never risk more than the initial trade in the entire process of adding to winning positions.

The other change I made was to cut the losses of a losing streak by trading with 1/5th the volume the moment I have a 2nd consecutive loss and only resuming normal volume once the small drawdown from the two losses is recovered.

What do you guys feel?

So far it’s working well.

If you think about good profits with a small deposit then you have to count DD at 20-30%.

"The less the DD the better" LOL

what about this: the less the deposit the better ?

u know if you are a professional then and only then keeping the DD low is a must, but since I'm not I'd rather use the damn leverage (not 1:500!), and start small. who cares about the DD ?

What is drawdown? When would happen drawdown?