In this episode of Truth About FX, Walter digs into the topic of hitting a drawdown and what you should do — or shouldn’t do — when the inevitable happens. He gives some useful points on risk reduction, trade exits, and what to do when you’re getting at a confidence downhill.

You will also learn from Walter’s own person experience.

Download (Duration: 08:36 / 9.84 MB)

In This Episode

00:38 – 60% drawdown

02:07 – massive winner

03:54 – fine tune

05:24 – potential path

07:36 – complex issue

Tweetables

Risk less per trade. [Click To Tweet].

How many winners do you get in a row in the beginning?  [Click To Tweet].

Take a test with a smaller account.  [Click To Tweet].

Interview Transcript

Hugh: Hi, Walter. We’ve got a question that came in through email. This trader says he did a ton of backtesting.

He was super positive that his system will be profitable and then what happened when he first start trading live was that he hit a drawdown of 60% at his first month.

He is asking: “What should I do from here? Did I mess something up or did I miss something?”

What do you think about that?

Walter: I know this trader and this is a really good question. I know that he is not the only who’ve experienced this. Basically, when I took him through, I said “Look, before you went live, did you go through your numbers?”

I’ll put in the show notes below this episode a link that you can use to go to a risk calculator and figure out what your risk was. A risk of that drawdown, because he had a drawdown of 60%.

I asked him “Look, did you go through and check that out?” and he said, “Yes, I went through it and I plugged it into my data for my trading system and I have a risk of 60%, drawdown was like 10%.”

Okay, that was his risk.

He could have reduced that risk — so he wanted 10 — he could have reduced that risk if he decided to trade less per trade. Risk less per trade, he could have done that.

The other thing that I’ll mention here — and this is probably something that a lot of people might not even realize because he was using or is using a trailing exit.

What that means is he’ll have to get a lot of trades under his belt before he sees his reward to risk ratio really inflate. The reason why that is is because, of course, he will occasionally get a massive winner using a trailing exit and that will inflate the average winner.

But, in the beginning — unless he gets lucky and locks into a really good runner — in the beginning, he is probably going to have a reduced reward to risk ratio.

He just simply hasn’t had one of those really big fat winners yet that you tend to depend on when you are using a trailing exit.

There’s two issues here…

One is, as he trades more, he is more and more likely to hit one of those big winners and that is really going to help him out.

Two is he could have reduced his chances of seeing such a dramatic drawdown if he had decided to risk less per trade. I know it is easy to say that in hindsight but you can use the calculator that is linked up...