Everyone is afraid of drawdowns. There is often an opinion that the drawdown 15-20% this is maximum, что может допустить здравомыслящий trader. 33% it already borders on a heart attack, and 50% leaving business, because, in order to recover the account from such a drawdown, it will be necessary to double the capital. All this, in theory, right.
But, in fact, there are different types of drawdowns and they are not identical to each other.
Very often, in trend tracking systems, when opening a position for a breakout of a certain level, the price immediately goes in the right direction, and the floating profit starts to rise. After a strong growth, the price turns back and closes at some level using a trailing stop. The wider the trailing stop, the more profit is given back to the market. In this example, 50% accumulated profit. But there are times that more — 70-80-90%, especially when all players fix profits at once and the price falls like a stone, while the system trailing stop is still approximately at the level of opening a position.
Here and in this case, drawdown will be displayed as 50%. At first sight, without grasping the essence of the matter, it seems incredibly much. But what's interesting, this drawdown posed no danger to capital, since the initial capital, вообше, has not decreased since the opening of the position. Only the potential profit was given away.
If the price when opening a position would have gone in the wrong direction, then the stop loss would have been triggered, which usually does not exceed 1-2%. It is necessary to get a lot of stop-losses in a row in order to draw a significant amount from the initial capital. I.e, in this case, even with a drawdown 99% risks are fully controlled.
Another type of drawdown is exactly the same, whom everyone fears. Position and price are opened, сразу же, goes negative. Since there is no stop loss, capital sinks by 50% and only a miracle, afterwards, saves the situation and the position even closes in a decent plus. Although, such, certainly, can not be — usually the position is closed when the price returns to breakeven. But we will assume that the trader got stuck and waited for his profit.. But the price may not have returned. I.e, in this case, the risks are completely out of control.
So here, completely different drawdowns, despite the fact that there, and there the value of the drawdown is the same — 50%.
In the first case, even a drawdown 99% not scary at all. And in the second and 15-20% can cause psychosomatic illness. :)
