This video will help traders understand what drawdown means when trading forex on the markets, it will help you understand your risk while trading. Drawdown is the difference between the account balance and the equity or is referred to as the peak to trough difference in equity. As one might know, the equity balance changes based on the open position’s P/L. When the equity balance drops below the account balance (i.e. when your equity is losing more than your balance) it is referred to as a drawdown. Drawdown measures the largest loss an account takes, therefore traders and investors should both pay attention to drawdown as it gives an overview of the loss taken by the account.
The simplest way to explain drawdown is when an account with equity of £500.00 takes a loss of £250.00. Here, the drawdown is 50%. Which when translated into layman’s term is nothing but the fact that the account can lose as much as 50% of its value.
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