Are you ready to showcase your trading skills in our upcoming contest? Before you jump in, it's crucial to understand one of the key rules that ensures fairness and promotes responsible trading: the maximum drawdown percentage (DD %).
What Is Maximum Drawdown (DD %)?
The maximum drawdown is a rule we've put in place to prevent excessive risk-taking and to level the playing field for all participants. It represents the largest drop in your account's equity from its highest peak during the contest. It's dynamically calculated at all times from the equity peak—not from your account balance, closed positions, or on a daily basis. Here's the simple formula:
Equity = Account Balance +/- Open Profit/Loss
How Is DD % Calculated?
Our system constantly monitors your account to record the highest equity peak you've reached. If your equity drops from this peak, the DD % is calculated based on the difference between the peak and the lowest point (valley) your equity reaches afterward. When you hit a new equity peak, the previous one is discarded, and the DD % calculation starts from the new peak.
A Step-by-Step Example
Let's break it down with an example:
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Starting Balance: Your demo account begins with $100.
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Trade #1:
- You open a position, and your equity rises to $120, marking your first equity peak.
- The market fluctuates, and your equity dips to $115. The DD % from your peak of $120 is now approximately 4%.
- The market moves in your favor again, and your equity climbs to $140. You close Trade #1, setting a new equity peak at $140.
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Trade #2:
- You open a new position, and your equity drops to $130. The DD % from the new peak of $140 is about 7%.
- The market surges, and your equity soars to $200, establishing a new equity peak—even though Trade #2 remains open.
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Market Downturn:
- Unexpected news causes the market to turn against you, and your equity falls to $120.
- The DD % from your last equity peak of $200 is now 40%.
According to the contest rules, if the maximum allowed DD % is 30%, exceeding this limit—even by a fraction—will lead to disqualification. In this case, the 40% drawdown surpasses the allowed maximum, and your account would be marked with a red circle on the rankings page.
Why Is This Rule Important?
The maximum drawdown rule is designed to encourage traders to manage risk effectively and to discourage reckless trading strategies that resemble gambling. By adhering to this rule, you not only stay in the contest but also develop disciplined trading habits that can benefit you in the long run.
Tips for Staying Within the DD % Limit
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Monitor Your Stats: Keep a close eye on your demo account stats page. This resource provides valuable insights to help you manage your trades during the contest.
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Peak Drawdown Display: The stats page shows the peak drawdown you've reached during the contest. By clicking on this figure, you can view a chart that illustrates your drawdown history over time.
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Max Allowed DD Tab: Pay special attention to this tab. It displays the maximum loss allowed from your equity peak in your account's base currency (e.g., USD) before you reach the maximum DD % limit set by the contest rules.
Staying informed and vigilant about your drawdown percentage is essential for success in our trading contests. By understanding and respecting the maximum drawdown rule, you not only maintain your eligibility but also enhance your trading discipline.