Trading without losses is impossible. Professional traders know this. And newcomers to the market sometimes treat losses overly emotionally, which only exacerbates the situation. Initially, you need to understand that drawdowns in trading are normal. A trader cannot trade without them. But its task is to reduce the size of drawdowns. This is what the trader should take care of. The fundamental way to solve this problem is to strictly adhere to the rules of money management. Opening trade deals with a large volume will inevitably lead to the loss of the entire deposit. In practice, it has been established that to reduce the risk of large losses, the order volume should not exceed 3-5% of the trading account amount. Every novice trader must learn this rule and follow it. Today I want to talk about the causes ofdrawdowns in trading and give some recommendations.
Reasons for a large drawdown in trading
One of the features of making money in the forex market is the volatility of income. After a period of successful trades and making good profits, there can be a “black streak” when things start to go wrong. And the usual profit size suddenly becomes inaccessible. Trading profits are declining, which can cause stress and frustration in trading. But experienced traders know that there is nothing wrong with reducing profits. This is a natural component in trading, which is temporary and amenable to adjustment. The situation can be corrected if efforts are made in certain areas.
Today we will talk about this topic and consider the question: why are the income from trading decreasing and what should be done by the trader. This information will be especially useful for newcomers to the market. I want to offer you an action plan to eliminate the negative dynamics of the amount of earnings in the market.
Correction of the psychological state
Psychology can be the reason for the drop in earnings. After several losing trades in a row, the trader's emotional balance is disturbed. And this leads to rash trading actions that further worsen the situation. In order to prevent such a development of events, you need to stop trading for a while and give yourself a little vacation. How to carry it out is up to the trader. Alternatively, you can take up another type of earnings, or take the time to improve your theoretical knowledge of the market. And you can go in for sports and improve your health. His condition, albeit indirectly, also affects the efficiency in trading.
After the psychological problems have been solved, you can proceed to the next stage - the analysis of mistakes made in trading. Often they are the main reason for the drop in earnings. In a calm state, it is necessary to carefully consider previously committed unprofitable transactions and identify wrong actions and decisions. Perhaps the root of the problem lies in the trading strategy itself. In this case, you need to optimize it using a tester and a demo account.
Creation of a new vehicle
Error analysis may show that the applied trading strategy no longer works. In this case, it is necessary to abandon its use and start creating a new vehicle. In general, a trader should always have several trading systems at hand and, if the effectiveness of one of them decreases, switch to trading using another strategy.
Development of a trading plan
Sometimes a decrease in trading income is the result of a lack of a trading plan. And all a trader needs to do is create such a plan. Some traders believe that in essence it should repeat the conditions of the trading system. But this is not the case. The trading plan should be as detailed as possible and include observations of the market, attitudes and procedures in case of unexpected developments in the market.
The most common mistake a trader makes, which leads to a reduction in the size of profits from trading, is neglecting the rules to reduce risks. We are talking about the absence of stop-losses and the opening of deals with large volumes. Stop losses should always be present, and the volume of a trade order should not exceed 3-5 percent of the amount of funds on a trading account.
Compliance with these rules will allow a trader to avoid a decline in earnings for a long time.