I know I'll get torn apart with this ("beginner") question but I don't care - go ahead and flame me if you want. My question is: If your account is $100,000. You have open trades in progress. The "drawdown" on your account capital balance is 7.64% (due to the open trades). This is a forex account. 50:1 margin is being used. Is that considered good or bad? Is that considered high risk, medium risk or low risk? Are there any other "important" financial indicators you should gauge your account by? I know different traders have different tolerances so I'm hoping to get honest views/assessments. Please, guys, go easy on the flames. The Coin
The best scenario would be the least drawdown so creating a risk profile would need to be compared to another level etc.
KevinK actually taught me this in an indirect way. If you measure drawdown against a ratio...say...max drawdown to cumulative profit and set a goal (mine is 1:4) then the lower your max drawdown is, the easier it is to obtain a higher ratio of profit. Now your system historically produces statistics that you can measure against the climate it trades in. For example the range and volatility of that years equity curve compared to the pairs volatility and range you participated in. This can serve as the possible capacity that your system is capable of in regards to taking what the market gives. All of this can help you "gauge" exposure, therefore guiding you in proper money management. I find competition to be the "best" is personal. The standard acceptable benchmarks are merely to see if your system is viable and worth refining. When taking a position and trading against the world can prove to be be quite humbling, when your winning and losing. Michael B. P.S. I suppose if your scalping, the benchmark if there is one, might be based on how much of the range you take in percent...
Sorry, I had my numbers wrong! Figures were based on more than $100,000 in the account. Hold up and let me give a more accurate accounting - lmao.
well, there's not really any way for me to modify the slighter adjustments (to the higher account balance). so we can safetly say the numbers given are less than those percentages. Also, I could add that total account capital to produce those numbers is based on having less than 6% exposed to margin. So, margin available would be over 94%. Maybe it would take an accountant to give me an accurate risk profile model assessment. Any accountants on ET?
Rather than attempt to figure out what numbers apply to which percentages, I'll share what I do, and you can see how it fits your situation. The maximum risk I carry on any one trade is 2% of account capital and often much less than that. With capital preservation my top priority, I use a more conservative approach to position sizing. The goal being to create an environment where the outcome of one trade going horribly wrong won't matter all that much. By example, if I enter a long position with stock ABCD @ 20.00 per share and set a stop of $19.50, I could buy 4000 shares to remain within my risk tolerance of 2% (using your account size of $100,000 USD). However, to reduce risk even further, I would probably diversify to 1000 shares each among four different 20 dollar stocks to achieve the same percentage risk, but avoid the "all eggs in one basket" phenomenon. - Spydertrader
Can you clarify what "6% exposed to margin" means? Are you saying that out of 100k, 6k is fully leveraged at 50:1 so that you have 300k in positions? Then it's simpler to say you have been using 3:1 leverage. You'd need to factor in other numbers to be able to say whether a drawdown is "acceptable" or within reason, given the leverage, volatility of market, duration, and overall expectation (in the generic sense) of the system employed. Or to get a very simplified idea, if you projected a 20% annual return on the system, and you've already hit 7% drawdown in 3 weeks, that is not a good sign; on the other hand if you're trying for triple digit percentage returns, 7% weekly swings in equity are well within reason.