In the world of trading, be it stocks or forex, success is often measured by the ability to consistently generate profits. However, even the most successful traders are not strangers to significant losses, or ‘drawdowns’. The concept of a drawdown – a decline in capital from a peak to a trough over a certain period – is pivotal in understanding the risk and volatility inherent in trading. One fact remains indisputable: a drawdown of more than 10% at some point in a trader’s career is not only likely but is often a common occurrence.
According to a study by Géron (2015), significant drawdowns are a regular part of the trading process, even among professionals. This research, conducted over a decade, revealed that hedge funds experienced average drawdowns of 12.8%. This indicates that drawdowns, including those beyond the 10% mark, are far from being a rarity. Instead, they should be viewed as an integral part of the trading landscape (Géron, 2015).
Further, Ernest P. Chan, in his book “Quantitative Trading: How to Build Your Own Algorithmic Trading Business,” acknowledges the inevitability of substantial drawdowns. While he does not provide specific percentages, the crux of his narrative is the importance of risk management to weather these anticipated drawdowns (Chan, 2008).
An enlightening examination of drawdowns comes from the Global Financial Crisis of 2007-2008, where even the largest hedge funds weren’t immune to drawdowns surpassing 10%. Bree and Joseph (2013) highlighted this in their study, underscoring that substantial drawdowns are not just for individual traders but can also be experienced by institutional trading bodies.
In conclusion, experiencing drawdowns exceeding 10% is a common facet of the trading profession. It is a testament to the volatility and risk associated with the stock and forex markets. Thus, it becomes essential for traders to arm themselves with a robust risk management strategy to navigate through these drawdowns and achieve long-term sustainability in their trading careers. You can get started on our live accounts where you have access to 30% drawdown on our get funded accounts.
- Bree, D., & Joseph, N. (2013). Resilience and water on financial markets following the Global Financial Crisis of 2007-2008. The Journal of Financial Stability, 9(2), 150-165.
- Chan, E. P. (2008). Quantitative Trading: How to Build Your Own Algorithmic Trading Business. John Wiley & Sons.
- Géron, Y. (2015). The Effects of Investment Size on Hedge Fund Performance. The Journal of Alternative Investments, 18(2), 89-103.