DislikedThe idea that 10% or less is considered an acceptable drawdown doesn't make sense to me.
I think we trying to use the standard of hedge funds and institutional traders and apply that to us retail traders. these guys have clients to answer to. Clients who probably never placed a trade in their life.
I personally think 20-30% drawdown for a retail trader is normal. If you decide to trade for others in the future, then that's a different story.
But for the most part retail traders should be able to withstand larger drawdowns and also can...Ignored
There's also a direct relation to profitability (looking at the ones that don't blow up, but still trade even if they are underwater) and leverage/risk used over time. You simply have a much higher chance of being net positive as a trader, in the long run, if you use less margin.
I also have no idea how smaller traders ever expect to grow their net worth, and make the $ returns they spend so much time daydreaming about, if they keep blowing away their capital on over leveraged trades.
Put another way (and as I've said here before,) traders are risk managers and decision makers. Their first priority is to protect/preserve capital and then decide what's working for them or what needs to be corrected. If you think "20-30% drawdowns are normal", then at what point do you start to think something's wrong? 50%? 60%? Blowout?
Worse yet, how many trades does it take to put you at a 30% drawdown? 5-6 consecutive losses? With most systems, that's not even a sign that something's wrong, and since there will always be a random distribution of winners and losers, such a streak could cripple your account before a series of winners comes along to accelerate the recovery.
And this is just the math/probability of it.. the mental side is even worse, as you're far more likely to cave to emotional pressures when you're looking at half your account balance gone, than say, just a few percent on a bad day. How much more damage will emotional/revenge trading factor into your fresh new account lows? Can you afford to make a few mistakes here before it's too late?
I know it's cliche, but the old saying: 'new traders focus on what they can make; professionals focus on what they could lose.' And it took me quite a while to really 'get it' myself, years even, but it's very true, since not only have I proved this to myself with my own trading journey, but I've yet to meet a trader who's been around for 10+ years, and independently successful at trading during that time, without this mindset.
Just saying. Take of this what you will, but one thing I'm trying to highlight here is the inability to accumulate capital thanks to deeper losses than the account can withstand, and being unable to adjust to the market since noise alone in the distribution of your winners and losers could cripple the account. Leverage and capital are just tools.. but like any tool, there's a danger to the operator if used improperly.
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