Drawdown and Coping with Losses
In back tests you are not likely to pick up the worst possible scenario and so most times a forex trading course will counsel at least doubling the drawdown that you find. However, if a run 3 times as bad occurred, our account would be wiped out. Whether things are likely to be this bad is dependent on how inclusive the back testing was and whether it covered a stable or an unstable period in the market.
So having done a calculation like this, you might take a different view of what your risk per trade should be. Obviously the % losses during that bad run are going to depend on how much was lost per trade. Reduce that, either by moving the stop loss or reducing the number or size of lots, and you may cut back the losses during the bad run. Of course you will also reduce profits that way there is, however, no point taking large risks to make enormous profits if the result will be that at some point all your profits and your original investment is wiped out. It is better to make smaller profits but keep on profiting and always recover from the bad times.
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