How is the drawdown limit calculated?

The drawdown limit is calculated as a percentage of the trading account balance. To determine the drawdown limit, you need to decide on the maximum acceptable loss you are willing to tolerate.

Here's an example to illustrate the calculation:

Let's say you have a trading account with a balance of $10,000, and you want to set a drawdown limit of 20%.

Step 1: Calculate the drawdown limit amount Drawdown Limit = Account Balance (Drawdown Percentage / 100) Drawdown Limit = $10,000 (20 / 100) = $2,000

The drawdown limit in this example is $2,000.

This means that if your account balance reaches or falls below $8,000 ($10,000 - $2,000), you would have reached your drawdown limit of 20%.

It's important to regularly monitor your account balance and compare it to the drawdown limit you have set. If the drawdown limit is reached, you may consider taking action to mitigate further losses or reassess your trading strategy.

Remember that the drawdown limit is a personal decision and should be based on your risk tolerance, trading strategy, and financial goals. It's crucial to carefully consider these factors and adjust the drawdown limit accordingly to align with your risk management plan.