Forex Trading Drawdown Types

Today, we are going to explain forex trading drawdown types with additional examples to explain each of them. This is a topic that most of our community has been asking for, and now it is finally here for everyone to learn more about. We are going to be going through three types of drawdowns. These are absolute, relative, and maximum drawdown. That being said, let’s jump into a general comparison of the three drawdown types.

1. Absolute Drawdown

Absolute drawdown is calculated from the initial starting balance of your trading account down to the maximum allowance below the initial starting balance of your trading account. This number is, in most cases, shown in a percentage of your trading account.

Example: Starting account balance of $10,000 with a 10% absolute drawdown rule

This means that you are allowed to lose $1,000 of the initial starting balance of your trading account. In addition, if you go below $9,000, you have violated the 10% absolute drawdown rule.

2. Relative Drawdown

Relative drawdown is calculated from the difference between the maximum value of equity in your trading account compared to the minimum value of equity in your trading account.

Example: Starting account balance of $10,000 with a 10% relative drawdown rule

This means that your starting relative drawdown limit is $1,000. If your first trade is negative and you lose 2% of your account, which is $200. Your relative drawdown limit stays at $1,000. However, your second trade is profitable, and it makes you a profit of $400, which is 4% of the initial starting balance of your trading account. Now your account balance is $10,200, and since your drawdown type is relative. The new relative drawdown limit sets higher at $9,200, which is $1,000 below the new account balance of $10,200. In addition, if you go below $9,200, you have violated the new value of the 10% relative drawdown rule.

3. Maximum Drawdown

Maximum drawdown is calculated from the highest value of balance on your trading account compared to the maximum allowance below the initial starting balance of your trading account.

Example: Starting account balance of $10,000 with a 10% maximum drawdown rule.

This means that you are allowed to lose $1,000 of the initial starting balance of your trading account. In addition, if you go below $9,000, you have violated the 10% absolute drawdown rule. However, if you make a profitable trade of 3%, which is $300. The new highest balance of your trading account is now $10,300. This means that your new maximum drawdown limit is $1,300 since you can now lose the previous $1,000 and the new $300 profit that you just made before you violate your 10% maximum drawdown rule.

4. Conclusion

In conclusion, we have mentioned that we have three different drawdown types in forex trading. Absolute, relative, and maximum drawdown types, of which we have examples above. That being said, it is essential to always familiarize yourself with the type of drawdown you are working with, so you can continuously calculate it to prevent chances of violating your trading account. Let us know in the comments which type of drawdown is your favorite to work with.

In addition, we would also advise you to check our in-depth proprietary trading firm reviews, as well as our Prop News section, where we release news articles about the proprietary trading firm industry.