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.

Never completely trust a robot?

The other day I came across an article with the above title. After reading it I thought that, beside the catchy title, what was really the appeal of the question?

I think it harks back to the deep set fear we have, that automation may be our ultimate doom - a la I-Robot or the Terminator.
I think it needs to be said loud and clear - "You are your Forex account's biggest enemy."
Compared to what the average greedy Forex trader is capable of in just "one adrenaline - caffeine induced trading rush" - even the most grave programming error of an expert advisor is a walk in the park.
I give you a real example of just last week: We had a client who was happy with the overall trading performance of one of the robots we developed, but had a couple of loss entries that he didn't understand. He wanted some clarification and sent us his account history. I don't know if you can imagine our bewilderment when we realized that this fellow had been trading at all the wrong hours. The robot's schedule was 180ª reversed - since he had not synched his account settings with his trading charts. Yet he had been writing up some beautiful profitable weeks!  We set him straight and the problem was solved with two clicks of a mouse, but - talk about trading without supervision.

I have said it before and will say it again - human emotions and human error caused by fear and greed are the number 1 enemy of you account.
If you have robot-trusting issues - this is what I recommend:

1. Do your research: buy a great forex robot from people who care and offer training and support. Make sure it has automatic money management controls and is specifically designed for the currencies you wish to trade.
2. Install your robot - check in once a day or once every other day to make sure it works fine - and let them do what they do best!

If you want more involvement read about our no trade days - but don't try to outguess the market it is a sure kiss of death for your accounts!
Other than that - trust your robots - they are not emotionally compromised...