The lowdown on drawdown - or - What is drawdown and why does it matter in automatic forex trading?

650% profit in the first 60 days trading!  

Win 100 pips with every trade! 

Never a losing trade! 

Claims like these are plentiful in the world of automatic forex trading - you can barely turn around without bumping into a new Forex Robot claiming sky high returns on your investment. However, rarely are we told what amount of your initial investment was in danger during trading to achieve such outrageous returns. 
The level of risk involved in a trading strategy is what we call its "drawdown".

Drawdown is the reduction of one's capital after a series of losing trades. This is normally calculated by getting the difference between a relative peak in equity capital minus a relative trough. Traders normally note this down as a percentage of their trading account. 

Drawdown is the very feature by which to evaluate the validity of the outrageous profit claims many Forex robots make. Surely, if the robot is planning to be risking 90% of your investment capital, the darn thing better have some hopes of astronomical profit - otherwise why take such an enormous risk. 
But we all know what happens in reality when sound money management goes out the window: One bad trade and your account is wrecked beyond repair.

Sound money management, with reasonable drawdown, in a low risk setting is the only way to make progress. Insane trading, with no sound controls, only to put your account at risk, always being at the mercy of one trade that could end it all, is a sure way to get an ulcer and lose your trading capital. Might as well go back to manual trading, at least you enjoy the gambling...

So, when evaluating your next Forex Trading Robot please, instead of being seduced by great sounding profit promises, take a close look at the risk settings used to obtain these profits.

Oh - and that last promise of "Never a losing trade" is of course completely silly - it is the equivalent of playing roulette and betting on the little ball never landing on "zero" again - won't happen - ever.