Alan Solarsh breaks down drawdown in forex trading: open trades show losses in red and profits in blue, but one profitable trade doesn't mean your account is profitable if others are losing. He recommends starting with cent accounts and 0.01 lot sizes, using dollar-cost averaging and hedging instead of closing losing trades, and scaling up slowly as you gain experience.
Questions this video answers
0.01 lot size (on a cent account)
One pip equals one US cent (≈ $0.01)
MetaTrader 4
Right. So I just wanted to explain to you what drawdown is, how it works, and what you can expect from drawdown. So when you start opening up trades, you're going to have a red bar over here or a blue bar. The red bar means that your trades are negative and you're not making profit yet. And when this area at the top of your MetaTrader 4 is blue, it means that your overall profit is, is your overall.
Profit or loss is actually profit. Okay? So when it's blue, you're in profit. When it's red, your trades are in a loss. Now mostly you can expect your trades to be in a loss, especially if you dollar cost averaging. There's nothing to be afraid of. I always look at the drawdown as owning a store. And on that store, if you, let's say you open a little shop that's stocks groceries, so you're going to have chips and you're going to have cold drinks and chocolates and you're going to have all sorts of little goodies in your, in your store. Now those things cost money. Okay, let's say you invested 10,000 of your currency into that shop. Let's call it US dollars because we're all trading in US dollars. So you, you invest $10,000 into your shop in the various different items that you're going to be selling. Now when you have a client and the customer comes in and buys some items, let's say the customer comes in and buys $100 worth of products from you when they come to the till and they pay for those products, have you made $100 profit? And the answer is no, because there is a cost to that product. So maybe your profit on that basket of goods is $50. The next question is, I ask you, have you indeed made $50 profit? And I say to you no, the answer is you haven't made the $50 profit because you may have still product in your store that has not been paid for yet. So that is how I draw a parallel between your forex account and opening a store where you may be profitable on one trade, but overall you've got other trades open that are in a loss. So you're not in profit. So it's, it's, it's important to note that this is going to take a bit of time for you to learn and grasp and get comfortable with the drawdown. Now a lot of people say to me that you should only risk 1% of your account. I don't understand that concept. I don't understand what they mean by risk, 1% of your account? Is it 1% before you have drawdown? Is it 1% at the highest peak of the drawdown? Nobody's actually answered that question. So some people say the maximum loss that you should have on a share or commodity or anything that you're trading is 10%. I also don't quite believe in that strategy. As you know, I don't close trades in a loss. I prefer to hedge trade and I prefer to dollar cost average. These are concepts that are new to most people and, and most traders, I would say 99 of traders don't understand and, or they don't know about. So this is totally foreign to some experienced traders, some novice traders and some really newbie traders. So it's going to take you a bit of time to start understanding. So I don't think that you should be afraid of drawdown. As I said in my presentation, risk is for those that don't understand. So if you don't understand how to read a forex chart, then yes, there's going to be risk associated with it. Therefore, you should be opening trades on a value of 0.01 lot sizes, no more than that on a cent account where the cost of one pip is equals to one US cent. So it's very important that you have, number one, the correct forex account that you've opened and number two, you're using the correct wallet management. This isn't a get rich quick scheme, this is a get rich for sure program with a strategy, mentors, tools, etc. You just need to apply yourself, take responsibility, start learning and apply those rules that you've learned and you eventually will start making profit. So I hope that this clarifies what the risk is, how to deal with the risk and how to deal with your drawdown. Again, begin with 0.01 lot size, go very slowly, don't get rambunctious when you've made a couple of trades and they've gone into profit. Okay, if you're going to increase your lot sizes irresponsibly, I assure you you're probably going to lose money and probably blow your account. So this is where you need to be scaling up your lot sizes very slowly and very gradually as your emotional equity increases at the same pace as your balance and your, your forex equity amount, which is this amount at the top here. So I don't think that you should be taking large risks here. And a lot of people, what I find is they increasing their lot sizes to pay for the cost of the product that you've purchased. This is the incorrect way to trade. You need to accept that there is a cost, and that cost is associated with education. That is how you need to understand the cost of the products that we are selling to you and the products that you have bought. It is a cost of education. Once you start understanding the cost and you start understanding the indicators and the products that we've sold you, you can then start increasing your lot sizes, increasing your risk, because you're now understanding what the risk is of each trade. And and then when it does go profitable, you will start making exponential growth on your account. So I hope that you enjoyed this video. Please.
Let us know in the Discord group if you have any challenges and we'll answer any questions you have. Thanks, and I'll see you on my next video.
