Just found out what drawdown actually means, so I want to share my understanding with you because it’s very important if you’re serious about trading.

Simply put, drawdown means the decline of your account from its highest point. It’s not just normal loss, but the accumulated decrease before it recovers once. For example, if you start with 10,000 baht and drop to 8,000 baht, that means the drawdown is 2,000 baht.

Actually, there are several types of drawdown you need to know. The first is Equity Drawdown, which measures the real-time decrease of your account, including both open and closed losses. If you’re trading and see your money temporarily decrease, that’s the current Equity Drawdown.

The second is Historical Drawdown, which looks back at the maximum loss your account has ever experienced. If your account once reached 15,000 baht but then dropped to 10,000 baht, that means the Historical Drawdown is 5,000 baht. This data helps you understand how much risk you’ve faced before.

Then there’s Relative Drawdown, expressed as a percentage. If your account grows to 20,000 baht and then drops to 15,000 baht, that’s a 25% drawdown. This is very useful when comparing accounts of different sizes.

Absolute Drawdown measures the loss from your initial deposit, not from the peak. If you deposited 10,000 baht and it drops to 8,000 baht, the Absolute Drawdown is 2,000 baht. This type helps you understand how much profit you need to recover to break even.

Finally, Floating Drawdown is the unrealized loss. If you open a trade and see your money decrease but haven’t closed the position yet, that’s Floating Drawdown, which can change as market prices fluctuate.

Now, the important thing is that drawdown represents the risk you need to understand and manage well. I have some practical ways to do that.

First, set a clear drawdown limit, such as deciding to accept a maximum loss of 10% of your account. When you reach this threshold, stop trading and review your mistakes.

Second, regularly use stop-loss orders. Set exit points in advance for each trade, rather than waiting for losses to grow before deciding.

It’s very important to risk no more than 2% of your account per trade. If your account is 10,000 baht, risk no more than 200 baht per trade. This prevents a single trade from destroying your account.

Another key point is the risk-to-reward ratio. If you risk 1, aim for at least 2 in profit. This helps ensure your profits outweigh your losses in the long run.

Finally, avoid trading based on emotions. When you’re losing, emotions may tell you to risk more to recover, which can make the drawdown worse. If you avoid impulsive decisions, you can better control your risk.

In fact, drawdown is part of the trading game. No one can avoid it, but you can prepare and manage it systematically. If you understand what drawdown is and handle it wisely, you have a higher chance of trading longer and making consistent profits.