I just realized that there is an important issue that many traders often overlook, which is Drawdown or account contraction. Drawdown means the decrease in the account balance from its peak before recovery. This kind of thing may sound technical, but in reality, it has a greater impact on our trading than we think.

Let's understand what Drawdown really is. Imagine this: if you start trading with 10,000 baht, and after some losses, your balance drops to 8,000 baht, that means you are experiencing a Drawdown of 2,000 baht. This number tells us how much we have lost since the account's highest point.

Why is this important? Because Drawdown helps us understand the true risk of our trading strategy. If the Drawdown increases, it indicates that the risk is rising, and our money management might not be sufficient. Conversely, a low Drawdown shows that we are controlling risk well.

There are several types of Drawdown that you should know. The first type is Equity Drawdown, which measures the real-time decrease in the balance, including unrealized losses and realized losses. This type helps us monitor risk immediately.

The second type is Historical Drawdown, which tells us the maximum loss our account has experienced in the past. For example, if the account once reached 15,000 baht but then dropped to 10,000 baht, the Historical Drawdown is 5,000 baht. This data helps us understand past worst-case scenarios and improve our strategies.

What about Relative Drawdown? It shows the contraction as a percentage of the peak balance. If the account grows from 10,000 to 20,000 and then drops to 15,000, the relative contraction is (20,000 - 15,000) divided by 20,000, multiplied by 100, which equals 25%. Using this percentage helps compare performance across accounts of different sizes.

Absolute Drawdown measures the loss from the initial deposit. If you deposit 10,000 baht and it drops to 8,000 baht, the Absolute Drawdown is 2,000 baht. This number indicates how much effort is needed to recover the lost funds.

Finally, Floating Drawdown tracks unrealized losses on open trades. If you open a trade and your account drops from 10,000 to 9,000 baht, but the trade is still open, the Floating Drawdown is 1,000 baht. If the market reverses before closing, the loss may disappear.

There are several ways to control account contraction. The first is setting a Drawdown limit, such as 10%. If cumulative losses reach this level, stop trading and reassess your strategy.

The second method is using stop-loss orders for each trade. This prevents losses from becoming too large.

The third method is setting a risk limit per trade, such as risking only 2% of the account balance on a single trade. This prevents a single trade from destroying the entire account.

It is also very important to maintain a risk-to-reward ratio, such as 1:2, meaning risking 1 to aim for 2 in profit. Doing this consistently ensures profitable trades outweigh losing ones.

Another approach is to periodically withdraw profits when the account grows or reaches profit targets. This helps prevent funds from being wiped out due to market volatility.

Most importantly, avoid trading out of revenge. When experiencing consecutive losses, frustration can lead to impulsive trading decisions. Doing so often worsens account contraction. Discipline and sticking to your trading plan are essential.

Understanding Drawdown means knowing how much your money has decreased and why. This helps you make smarter decisions in the market. Good control of account contraction is the foundation of sustainable trading in the long term.