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Forex drawdown is the decrease of investment capital in the result of repeated loss trades that may rotate with profitable trades. It is determined in quantity terms as the difference between previous High on curve of the capital and Low. Let's figure out in details what drawdown support means.
Trading with that technique, you increase amount of your position if financial market moves to the side, which is not opposite to your trade. This technique will suit strategies, in which initial movement of price is against open trade but then price moves to your side closing trade at a profit. Bases on that, we can conclude that this method is totally opposite to the Maximum Favorable Excursion. This way drawdown increases number of contracts traded in wait for market reversal and closing of trade at a profit.
Formulas:
When market movement in expressed in per cent.
where:
а – is initial amount of traded volume after profitable trade
p1 and p2 – measurement of initial and final price of market movement
X – number of traded contracts added to existing position on condition that market movement criteria is met .
М – cost of contract
k and k% - market movement in per cent and absolute expression
Variables:
- Number of traded contracts added to initial number (already existing) on condition that main criteria of price movement is met.
- Market movement in the direction opposite to taken position in per cent and absolute expression
Example:
Let's assume that your trading capital (account) amounts to 20 000$ and you are going to start from trading with two contracts and that you even wish to increase your existing position for 1 contract if market moves in the direction opposite to taken position for 500$. Then, if cost of contract is 1 000$ and such movement against your position for 500$ takes place, you trade with 2+1=3 contracts, in case of movement – for 500$ more, that is to say 500$+500$=1000$, you trade with 2+1+1=4 contracts and so on until you close your position or your trading capital is enough to increase volume of contracts.
