When trading foreign exchange, one thing is certain: losses will definitely come your way. However, the real issue is not the loss itself, but whether you can manage it well. That’s where drawdown comes into play.

I’ve noticed that many traders don’t pay attention to tracking their own drawdown. They only look at their final profit or loss, but that’s a very short-sighted view because drawdown actually tells you a lot about the health of your account.

See, drawdown is a measure of how much your account has decreased from its previous peak before it recovers. Suppose you start with 10,000 baht, then experience several consecutive losses, leaving you with 8,000 baht. Your drawdown is 2,000 baht. It’s simple but means much more than you might think.

Why is it important? Because it tells you how much risk you’re taking. A larger drawdown means higher risk; a smaller drawdown indicates you’re managing your money better. It’s a real indicator of the stability of your strategy.

There are different types of drawdown you need to know first. First, there’s equity drawdown, which is a real-time measurement of what’s happening to your account right now, including open and closed losses. This is one you need to watch closely because it shows real-time psychological pressure.

Then there’s historical drawdown, which looks at the past. It tells you what the worst situation your account has ever experienced. If you once reached 15,000 baht but dropped to 10,000 baht, your historical drawdown is 5,000 baht. This is useful for observing patterns and learning from mistakes.

Another type is relative drawdown, expressed as a percentage. Suppose your account grew from 10,000 to 20,000 baht, then dropped to 15,000 baht. The relative drawdown is 25 percent. This is useful when comparing accounts of different sizes.

And what about absolute drawdown? This is the loss from your initial deposit. If you deposited 10,000 baht and it dropped to 8,000 baht, your absolute drawdown is 2,000 baht. It’s important when considering how long it might take to recover.

Finally, there’s floating drawdown, which is an unrealized loss from open trades. It fluctuates with the market. If you open a trade that temporarily reduces your account from 10,000 to 9,000 baht, but it’s not closed yet, your floating drawdown is 1,000 baht. It can disappear if the market turns around before you close the trade.

So, what should you do about this? First, set a drawdown limit for yourself. Tell yourself, “I will accept a maximum drawdown of 10 percent. When I reach that point, I will stop trading and evaluate what’s happening.”

Another key point is to always use a stop loss. It’s a risk management tool that automatically closes your trades when losses reach a certain level. It’s like a safety guard against injury.

Limit the percentage of your account you risk on a single trade. I prefer the 2 percent rule, meaning I won’t risk more than 2 percent of my account on any one trade. This way, even if I make a mistake, it won’t cause a large drawdown.

Your risk-to-reward ratio should be positive. Try using 2 to 1, meaning you aim to make 2 baht profit for every 1 baht you risk. This way, even if you lose many trades, your winning trades will compensate for the losses.

And most importantly, don’t trade based on emotion. When you lose, you might feel frustrated. That feeling can lead you to trade again to get revenge, but that often worsens your drawdown. Stick to your plan and keep your emotions out of the trading room.

In summary, drawdown isn’t something to fear. It’s just part of trading. The problem arises when you don’t manage it well. If you track your drawdown, set limits, use stop loss, and follow risk management rules, you’ll be more stable in the long run.