The Maximum Trailing Drawdown is a key component of SabioTrade’s risk management system, designed to evaluate traders' ability to preserve capital and manage risk effectively. It is dynamic, meaning it adjusts based on your account’s performance, and it ensures that traders adhere to sustainable trading practices.
Key Components of the System
- High Water Mark (HWM):
The HWM is the highest balance your account has ever reached based on closed trades. It represents your peak trading performance and serves as the reference point for calculating your drawdown limits.
- If you make profits and close trades, the HWM is updated to this new peak.
- If you experience losses, the HWM remains unchanged.
- Maximum Drawdown Limit (Lowest Equity Allowed):
This is the lowest your equity (balance + open trades) can drop before breaching your account. It is calculated as 6% below the HWM.
- Formula: Maximum Drawdown Limit = HWM - (6% of Initial Balance)
- Example: If your HWM is $52,815.90, the Maximum Drawdown Limit is: $52,815.90 - $6,000 = $49,646.95.
- Current Equity and Balance:
- Current Balance: The total value of your account from closed trades.
- Current Equity: The real-time value of your account, including both closed trades and open positions.
Your equity fluctuates with the market, and you must monitor it closely to ensure it stays above the Maximum Drawdown Limit.
Dynamic Adjustments
The system is dynamic, meaning the drawdown limit adjusts whenever your account hits a new HWM. This ensures that:
- Profits are protected as the drawdown threshold rises with your account performance.
- You’re encouraged to manage risk effectively while maintaining capital preservation.
For example:
- If your HWM increases to $102,000, your new Maximum Drawdown Limit is $96,000 ($102,000 - $6,000).
- If your equity drops below this threshold, your account will breach.
Why It’s Important
- Risk Control: The Maximum Trailing Drawdown ensures you manage your trading responsibly by limiting losses to a manageable percentage.
- Profit Preservation: The trailing mechanism protects a portion of your profits, even if trades start moving unfavorably.
- Alignment with Real Markets: This system mirrors real-world trading conditions, where effective risk management is essential for success.
How to Use This Information
- Monitor your Max Trailing Drawdown to understand how close you are to breaching the drawdown limit.
- Use your HWM and Maximum Drawdown Limit as benchmarks for managing risk and preserving your capital.
- Adjust your trading strategy to recover equity and stay within permissible drawdown limits.
By understanding and utilizing this system, you can enhance your trading discipline and ensure sustainable growth on the SabioTrade platform. Take into account that it is possible, and often very common, to breach your account due to exceeding the 6% Maximum Drawdown Limit without exceeding the 5% Daily Loss Limit.