Drawdowns Explained

An investment is said to be in a drawdown when its price falls below its last peak. The drawdown percentage drop in the price of an investment from its last peak price. The period between the peak level and the trough is called the length of the drawdown period between the trough, and the recapturing of the peak is called the recovery. The worst or maximum drawdown represents the highest peak to trough decline over the life of an investment. The drawdown report presents data on the percentage drawdowns during the trading program’s performance history ranked in order of magnitude of loss.

  • Depth: Percentage loss from peak to valley
  • Length: Duration of drawdown in months from peak to valley
  • Recovery: Number of months from valley to new high
  • Start Date: Month in which peak occurs.

The Time Frame of a Forex Funds Investment

Investing in Forex is speculative and tends to be cyclical. Additionally, even the most successful professional traders experience periods of flat returns or even drawdowns. Consequently, those trading periods will suffer losses. The wise investor will remain steadfast in his/her investment plan and not close the account prematurely to allow the account to recover from temporary losses in equity. It would not be a wise investment strategy to open an account that you do not intend to maintain for at least six to none months.

Forex Volatility

Forex and volatility go hand-in-hand.  Forex volatility is determined by the movement of a Forex rate over a period. Forex volatility, or real volatility,  is often measured as a normal or normalized standard deviation, and the term historical volatility refers to the price variations observed in the past, while implied volatility refers to the volatility that the Forex market expects in the future as indicated by the price of the Forex options.   Implied Forex volatility is an actively traded options market determine by the expectations of Forex traders as to what real Forex volatility will be in the future.  Market volatility is a critical component of a Forex traders evaluation of a potential trade.  If the market to too volatile, the trader might determine that the risk is too high to enter the market.  If market volatility is too low, the trader might conclude that there is not enough opportunity to make money so he would choose not to deploy his capital.  Volatility is one of the most critical factors that a trader considers when he is deciding on when, and how, to use his capital.  If a market his highly volatile, a trader might choose to deploy less money then if the market was less volatile.  On the other hand, if volatility is low, a trader might decide to use more capital because lower volatility markets might offer less risk.

Forex Risk Management

Forex risk management is the process of identifying and taking action in the areas of vulnerability and strength in a  Forex portfolio, trading or other managed Forex account product. In Forex options, risk management often involves the assessment of risk parameters known as Delta, Gamma, Vega, Rho, and Phi,  as well as determining the overall expected return per Forex trade in the monetary loss to traders willing to forgo if the trade goes wrong. Having proper risk management can often make the difference between success and failure especially when dealing in the Forex markets.

Forex Funds And The Standard Deviation Measurement

One of the most common measurements used by professional investors when they are comparing Forex funds track records is the standard deviation.  Standard deviation, in this case, is the level of volatility of returns measured in percentage terms over a period of many months or even years. The standard deviation of returns is a measurement that compares the variability of returns between funds when combined with data from annual returns.  Everything else being equal, an investor will deploy his capital in the investment with the lowest volatility.

Forex Managed Accounts and Absolutes Returns

A managed Forex account must be judged based on absolute returns. However, the performance must be consistent with the Forex funds strategy.  The concept of “absolute returns” is for the Forex account to yield consistent, positive returns over an extended period. The managed Forex account, or Forex fund, can be compared to a fixed income fund, or an asset-backed lending fund based on its absolute return over time.