Online forex trading: Of drawdown and recovery

by ’Kunle Adeyer

There is always downtime in all ramifications of life. It is always a crucial period when survival instincts and strategies come alive to those who want to overcome. My previous articles have been serially written involving education, live trading and discipline. But there comes a time when one goes overboard or something goes wrong. This is the acid test of a forex trader.

Every trader must be in this ‘mess’ once or many times. Drawdown is simply when your equity or trading fund falls short of the initial value. It is psychologically disturbing. It literarily is as if one’s business is sinking. It could still be tolerated if it is just the trader’s account but when it comes to funds or client’s account being managed; it is not a funny story or smiling time for traders.

I can guarantee you as a prospective trader that you will find yourself or your account in this situation, at least once, as compared to the late Tai Solarin’s ‘May your road be rough’. It will definitely be in forex to climb to the top. But for every problem there is a solution. I once wrote in this column about recovery plans and management. Recovery of drawdown to equity level or breakeven point and later profitability is the focus of such trader.

The very first thing is the belief that you can do it. If the courage or confidence is not there, then there is no way you can deploy the techniques even in the face of a sure trend. That is the reason why I proposed that one should start live trading early after training provided good training has been obtained. This refines you as a trader. I always tell my trainees that the difference between me and them is that I have somehow overcome fear and that they will go places if they surmount the market without fear.

In this quagmire, a trader should deploy the following. First, is profit management. I have used this weapon a lot of times to get positive results during drawdown.

A trader who lacks this technique may not have a backup to rely on. Profit management account gives me the psychological boost that something is in the kitty and I can always access, if need be.

The second thing is to adhere strictly to discipline. With discipline you can ride to the top again. Never be too much in a hurry to recover. Rely on the adage that a damaged/wounded skin takes time to heal.

Reduce your lot size in comparison to earlier ones. In addition, if your stop loss is not in place, never find it difficult to close your orders at losses to have fund to trade. It is better than you having a margin call or burn out. 

Thirdly, let your technical skills come alive and be bold to go for your ‘sure’ trade orders. You may also trade economic news to boost your account. Scalping – that is profiting on short trades – can help but never scalp too much not to incur the wrath of your broker if your broker discourages much scalping.

Hedging is another method as proposed in my article dated February 15 in this column.