Drawdowns

A drawdown refers to a drop in the trading balance of a trader. It happens fairly regularly in forex trading. So it is not uncommon to see drawdown from time to time as a darwin investor on Darwinex. What should you do at this point? Should you sell your investments once the darwin hits a drawdown?

This post takes a look at how best to react when you are facing a drawdown as a Darwinex investor.

Obey Your Risk Threshold

As we mentioned in this post, you need to know your risk limit before you purchase a darwin. When you see the drawdown approaching this limit, stick to your initial plan and exit. Ideally, you should set this limit as a static stoploss so that once the darwin’s quote falls to this level, your investments will be closed out automatically.

Monitor Trader Behaviour

Drawdowns bring out the worst in forex traders. It is at this point that some of them descend into destructive behaviours that ultimately end in a crashed account. During a drawdown, therefore, you don’t always have to wait for your predetermined risk threshold to be breached before you exit.

Take a look at the trader’s behaviour in the underlying strategy tab on the darwin’s page.  If you see an increase in the number of trades or increased risk (rising D-leverage), it is time to exit.

underlying strategy tab

The same applies if the Value at Risk (VAR) graph in the Risk Stability window (opened by clicking the RS attribute) suddenly starts flying up.

Bad Var During Darwin Drawdown

A combination of all or some of these factors almost guarantees deeper drawdowns. Even if the trader gets lucky and gets out of the current drawdown, will they be lucky next time?

So what happens when the drawdown is just a small correction that isn’t likely to hit your threshold? What should you do when the trader’s behaviour is still consistent?

Do Nothing

It is as simple as ignoring the drawdown and waiting for better times. The market conditions may be affecting the strategy at the moment, but the tides can change soon. Just as the trader is staying calm, you the investor should remain calm. Remember, you are not paying any fees if the trader isn’t making any profits.

Don’t make the mistake of selling the darwin with the hopes of jumping back in when it is out of the drawdown. This may not work in your favour. There is no guarantee that the recovery will continue into an upwards breakout.

Add More to Your Investments

If you trust the trader and the darwin, a minor drawdown that doesn’t look likely to reach your risk threshold is an opportunity to increase your investments.  This is a strategy that is used by many investors on Darwinex.

So assuming your risk threshold is 20%, you can add some investments when the drawdown is at 5%, 10% or 15%. The choice is up to you. The idea is to take advantage of the recovery which you expect will happen soon on this trusted darwin.

Conclusion

As an investor facing a darwin drawdown on Darwinex, the four main choices available to you include: exiting at your selected risk level, exiting in the face of harmful trader behaviour, riding out the drawdown with the trader and adding to your investment.

The final decision lies with you. However, it is essential that you handle drawdowns as described here. Knee-jerk reactions will only affect your investments negatively.

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Lead image credit:Babypips