One Way To Choose A Forex Signal Provider – Let’s Examine Draw Downs
To begin, let us define the term Draw Down. A draw down is the total amount lost between an extreme high and an extreme low and is the very first thing a person seeking a third party signal provider should pay close attention to. The draw down amount encompasses open positions without taking into account the margin required to prevent a margin call. The burning question becomes then how much draw down is too much draw down? Like many questions asked of the trading business, the answer is – it depends. This is not a cut and dried circumstance; many factors abound in the answer to this question. A person with an account of many thousands of dollars can obviously tolerate more draw down than a person with less, but what else is entailed in the answer?
Another thing to look at aside from the actual number is how that number came to be. If a trader has a draw down that is too high for you to tolerate but otherwise seems to trade well, you should look at how many positions he opens at a time. If that trader opens 5 trades on any given pair at a time you can instantly cut their historical draw down by 5. Limiting the # of open trades for a trader could drastically reduce the overall draw down.
Sometimes you will find a trader who has a great track record aside from one major meltdown where a single trade ran out of control for days unchecked. This will produce an abnormal draw down in relation to the trader’s real ability. He may be the kind of guy who can’t recognize when a trade has no chance of coming back to even. He may also be a guy who lost his internet connection at an inopportune time once or twice. Either way you can keep this trader from doing this to your account by setting your own stops for him. Just make sure that you only stop out his trades that are well out of a realistic trading range.
Time to return to the question that began this article. Once you have done all you possibly can to limit draw down, my feeling is that any number over 35% of your total account equity is exorbitant. If you get into a set of circumstances where you are suffering a 50% or greater loss, it is well nigh impossible to ever recover from those losses without undertaking risk in the extreme. Think about it. Do the math. If you suffer a 50% loss, you need to make a 100% recovery just to break even.
Historical information on the trader is another important consideration to take into account. A lengthy history being available can illustrate to you just how the trader handles rough seas in the trading arena. You want to know this because there will be rough seas in your trading future and you want a steady captain at the helm.
You must constantly monitor your traders on all of your accounts, whether live or demo. Should any draw down run rampant, you will need to reevaluate and possibly delete the trader from your active portfolio.
To learn more about Managed Forex Accounts visit Automated Forex Trading Systems.
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