Maximum Drawdown is the risk that Thai traders need to understand — 5 loss management methods that must be practiced

The True Meaning of Maximum Drawdown in the Forex Market

Maximum Drawdown is something to understand before starting to trade. Often, new investors complain, “Why is my account so low?” before realizing that drawdown is part of investing.

Drawdown refers to the total amount of loss accumulated in a trading account, measured from the peak to the trough when the account declines before recovering to the original level. What is the difference between “loss” and “decline”? Loss is the actual money that leaves the account, while drawdown may still be just unrealized losses (unrealized) or completed losses (realized).

For example: A trader deposits 10,000 THB. After a failed trade, the account drops to 8,500 THB. At this point, the drawdown is 1,500 THB. If the account recovers, the drawdown disappears. But if it drops further to 8,000 THB, the drawdown becomes a loss of 2,000 THB.

5 Types of Maximum Drawdown You Need to Understand

1. Absolute Drawdown — Loss from the initial capital

Absolute Drawdown measures the loss from the initial deposit to the lowest point, not considering the peaks during trading.

Example: An investor starts with 20,000 THB. The strategy fails as expected, and the account drops to 17,500 THB. Therefore, Absolute Drawdown = 20,000 − 17,500 = 2,500 THB.

Why is it important? Because it shows how much you risk losing from your real money deposit. Knowing the Absolute Drawdown helps you set realistic recovery goals.

2. Relative Drawdown — Viewed as a percentage for comparison

Relative Drawdown shows the loss as a percentage relative to the account’s peak. Formula: (Peak − Trough) ÷ Peak × 100

Example: Your account grows from 15,000 THB to 25,000 THB, then drops to 20,000 THB.
Relative Drawdown = (25,000 − 20,000) ÷ 25,000 × 100 = 20%

The advantage of calculating in percentage is that it allows comparison between accounts of different sizes. Whether you start with 5,000 or 50,000 THB, the same % indicates the same level of risk.

3. Equity Drawdown — Reflecting the real-time world

Equity Drawdown is what you see in real-time on your computer screen, including unrealized losses from open trades (unrealized) and realized losses from closed trades (realized).

Example: Your account has 30,000 THB. You open a trade with a temporary loss of 2,000 THB, and previously closed other trades with a loss of 1,500 THB.
Equity Drawdown at this moment = 3,500 THB

Importance: Equity Drawdown indicates the true psychological stress. When the number decreases all day, your emotional tolerance (emotional tolerance) reaches its limit.

4. Floating Drawdown — The risk that remains

Floating Drawdown is an unrealized loss from open positions. If the market turns around, it may disappear.

Example: You open a EUR/USD trade at 1.1000. The account drops by 800 THB, but the trade is not closed yet.
Floating Drawdown = 800 THB (temporary)

If the market bounces back, this drawdown could turn into profit. For this reason, many traders panic-sell at the worst possible moment.

5. Historical Drawdown — Lessons from the past

Historical Drawdown shows the maximum decline the account has experienced in the past. It is a measure to evaluate “how severe the worst loss has been.”

Example: Checking an account over 6 months shows:

• Peak: 40,000 THB
• Trough: 32,000 THB
• Historical Drawdown = 40,000 − 32,000 = 8,000 THB (or 20%)

Reviewing historical drawdown helps you understand the “worst-case scenario” that has occurred and serves as a warning for future investments.

Example formulas and calculations (Comparison table)

5 Ways to Seriously Control Maximum Drawdown

( Method 1: Set Drawdown Limits Before Trading

Decide in advance, “I am willing to risk only up to 15% loss.” When reaching the limit, stop all trading even if the strategy still looks good.

Benefit: Prevent emotional decisions from damaging the entire account.

) Method 2: Use Stop Loss in Every Trade

Stop Loss is setting a predetermined “cut-loss” price. For example, buy at 1.1000, set stop loss at 1.0950 to limit loss to 50 pips.

Benefit: Each loss is small, avoiding unexpected large losses.

Method 3: Proper Position Sizing

Never risk more than 2% of your account per trade. For a 20,000 THB account, maximum risk = 400 THB per trade.

Benefit: Even if you lose 3-4 trades in a row, your account can still survive.

Method 4: Create a Reasonable Risk:Reward Ratio

Set a target profit at least twice the potential loss. Example: Risk 100 THB to aim for 200 THB profit.

Benefit: Even if you lose 40% of trades, a good risk-reward ratio can still make you profitable.

Method 5: Take Profits Regularly to Lock Gains

When the account grows or profits are good, withdraw some funds or switch to lower risk.

Benefit: Protect your capital from risks and avoid emotional trading.

The Importance of Managing Drawdown for Thai Investors

Successful investors are often not those who always win, but those who manage to keep drawdowns minimal. Often, losing 30% is harder than gaining 40%, because from 100 THB, losing 30% leaves 70 THB. To return to 100 THB, you need to win about 42.85%, not just 30%.

Understanding Maximum Drawdown means understanding your trading style, managing your mindset, and preparing for market movements against your position. Often, honesty in following your strategy and discipline in executing the plan are more important than searching for “magic formulas” or secret techniques.

A tip for beginners: Start trading on a demo account to experience drawdowns without risking real money, then gradually increase confidence once your strategy proves itself.