To begin, let us define the term Draw Down. A draw down is the total amount lost between an extreme high and an extreme low and is the very first thing a person seeking a third party signal provider should pay close attention to. The draw down amount encompasses open positions without taking into account the margin required to prevent a margin call. The burning question becomes then how much draw down is too much draw down? Like many questions asked of the trading business, the answer is - it depends. This is not a cut and dried circumstance; many factors abound in the answer to this question. A person with an account of many thousands of dollars can obviously tolerate more draw down than a person with less, but what else is entailed in the answer?
You have the draw down number. How was that number derived? If the draw down number seems intolerable to you but other factors make the trader a good bet, examine the number of positions the trader opens at a single time. Say he opens 5 trades on whatever pair at one time, right away you can cut their recorded draw down by 5. If a trader's number of open trades is limited, that alone severely reduces the entire draw down figure.
A trader can often have an excellent historical track record except for one single mega-meltdown, where the trader simply zoned out and let a trade run amok on him and unmonitored for days on end. This will reflect badly on him but really should not overly affect the scope of the trader's abilities. What if the trader simply can't tell when a trade has a snowball's chance in hell of making a comeback to even? What if, heaven forbid, his internet connection lost it at the most inauspicious times? In either case, avoid this problem by setting your own stops for the trader. Don't though, stop those trades that are reasonable, stop only those that are beyond the outer rim of a realistic (to you) trading range.
Now that we're half way down the page lets revisit our original question. After doing anything and everything you can to limit draw down, I would say that anything over 35% of your entire account equity is just too much. Once you start to get into a situation where you are losing 50% or more it is very tough to ever recover without taking extreme risks. If you lose 50% you need to make 100% just to get back to even.
Historical information on the trader is another important consideration to take into account. A lengthy history being available can illustrate to you just how the trader handles rough seas in the trading arena. You want to know this because there will be rough seas in your trading future and you want a steady captain at the helm.
Also remember to constantly monitor your traders on both a live and demo account. If their draw down gets out of hand it may be time to reevaluate or completely remove that trader from your portfolio. - 22871
You have the draw down number. How was that number derived? If the draw down number seems intolerable to you but other factors make the trader a good bet, examine the number of positions the trader opens at a single time. Say he opens 5 trades on whatever pair at one time, right away you can cut their recorded draw down by 5. If a trader's number of open trades is limited, that alone severely reduces the entire draw down figure.
A trader can often have an excellent historical track record except for one single mega-meltdown, where the trader simply zoned out and let a trade run amok on him and unmonitored for days on end. This will reflect badly on him but really should not overly affect the scope of the trader's abilities. What if the trader simply can't tell when a trade has a snowball's chance in hell of making a comeback to even? What if, heaven forbid, his internet connection lost it at the most inauspicious times? In either case, avoid this problem by setting your own stops for the trader. Don't though, stop those trades that are reasonable, stop only those that are beyond the outer rim of a realistic (to you) trading range.
Now that we're half way down the page lets revisit our original question. After doing anything and everything you can to limit draw down, I would say that anything over 35% of your entire account equity is just too much. Once you start to get into a situation where you are losing 50% or more it is very tough to ever recover without taking extreme risks. If you lose 50% you need to make 100% just to get back to even.
Historical information on the trader is another important consideration to take into account. A lengthy history being available can illustrate to you just how the trader handles rough seas in the trading arena. You want to know this because there will be rough seas in your trading future and you want a steady captain at the helm.
Also remember to constantly monitor your traders on both a live and demo account. If their draw down gets out of hand it may be time to reevaluate or completely remove that trader from your portfolio. - 22871
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To learn more about Automated Forex Trading Systems or to choose a signal provider at Zulutrade visit http://www.automatedforextradingsystems.com .
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