In forex trading, drawdown refers to the peak-to-trough decline in the equity curve of a trading account, which indicates the amount of loss a trader experiences during a losing streak. Relative drawdown, on the other hand, is a percentage measurement that compares the maximum drawdown to the highest equity peak. Essentially, relative drawdown measures how much a trader has lost in relation to the highest point of their account.
Relative drawdown is a crucial metric for forex traders as it helps them to determine the risk of their trading strategy. It is important to note that every trading strategy has its own level of risk, and it is up to the trader to determine how much risk they are willing to take on. Relative drawdown can be used as a tool to help traders calculate the maximum level of risk they are willing to accept.
For instance, if a trader has a maximum relative drawdown of 10%, it means that they are willing to accept a loss of up to 10% of their account balance. If the drawdown exceeds 10%, the trader may need to consider reviewing their strategy or adjusting their risk management approach.
It is important to note that relative drawdown is not a measure of the overall profitability of a trader’s strategy. A trading strategy that has a high relative drawdown does not necessarily mean that it is unprofitable. In fact, some successful trading strategies may have a higher relative drawdown due to the nature of their trading style.
For example, a scalping strategy that aims to make small profits on multiple trades per day may have a higher relative drawdown than a swing trading strategy that aims to make larger profits on fewer trades. This is because the scalping strategy involves taking on more trades, which increases the likelihood of experiencing losses.
Traders can calculate relative drawdown manually by dividing the maximum drawdown by the highest equity peak and multiplying the result by 100. Alternatively, trading platforms may offer built-in tools that automatically calculate and display relative drawdown.
It is also important for traders to understand the difference between relative drawdown and absolute drawdown. Absolute drawdown measures the actual dollar amount lost during a losing streak, while relative drawdown measures the percentage loss relative to the account’s highest peak.
In conclusion, relative drawdown is a crucial metric for forex traders to determine the risk of their trading strategy. It measures the percentage loss relative to the highest equity peak and helps traders to calculate the maximum level of risk they are willing to accept. However, it is essential to note that relative drawdown is not a measure of profitability and should be used in conjunction with other metrics to evaluate the success of a trading strategy.
