So, you are in the market for a third party signal provider. The maximum draw down of the trader is your first step in the selection process. To define the maximum draw down - this is the gap between the ultimate amount of loss between the absolute top and the absolute bottom. Included in this number is also the open positions, but not included is the account margin necessary to keep you away from a margin call. How much is too much of a draw down you may well ask. Of course, like many answers to many questions, it is - That depends. Many, many issues need to be examined when coming up with an answer to this very important question. It goes without saying that a person with an account in the high thousands of dollars can stand more of a draw down than a person with a much smaller account. So, that being said, what are some other things to consider?
You have the draw down number. How was that number derived? If the draw down number seems intolerable to you but other factors make the trader a good bet, examine the number of positions the trader opens at a single time. Say he opens 5 trades on whatever pair at one time, right away you can cut their recorded draw down by 5. If a trader's number of open trades is limited, that alone severely reduces the entire draw down figure.
A trader can often have an excellent historical track record except for one single mega-meltdown, where the trader simply zoned out and let a trade run amok on him and unmonitored for days on end. This will reflect badly on him but really should not overly affect the scope of the trader's abilities. What if the trader simply can't tell when a trade has a snowball's chance in hell of making a comeback to even? What if, heaven forbid, his internet connection lost it at the most inauspicious times? In either case, avoid this problem by setting your own stops for the trader. Don't though, stop those trades that are reasonable, stop only those that are beyond the outer rim of a realistic (to you) trading range.
Time to return to the question that began this article. Once you have done all you possibly can to limit draw down, my feeling is that any number over 35% of your total account equity is exorbitant. If you get into a set of circumstances where you are suffering a 50% or greater loss, it is well nigh impossible to ever recover from those losses without undertaking risk in the extreme. Think about it. Do the math. If you suffer a 50% loss, you need to make a 100% recovery just to break even.
When considering draw down you should also look at how much history is available on that trader. If he only has 3 weeks of history than chances are that his largest draw down is yet to come. If he has 50 or 100 weeks of history he has probably already hit some rough patches and you can get a better idea of how rough the rough patches are for that particular trader.
Do not just let go once you have selected your trader. You must constantly monitor his activity on both live and demo accounts. Should his draw down get crazy, it is undoubtedly time to reappraise your situation with him and perhaps delete him from your portfolio completely.
You have the draw down number. How was that number derived? If the draw down number seems intolerable to you but other factors make the trader a good bet, examine the number of positions the trader opens at a single time. Say he opens 5 trades on whatever pair at one time, right away you can cut their recorded draw down by 5. If a trader's number of open trades is limited, that alone severely reduces the entire draw down figure.
A trader can often have an excellent historical track record except for one single mega-meltdown, where the trader simply zoned out and let a trade run amok on him and unmonitored for days on end. This will reflect badly on him but really should not overly affect the scope of the trader's abilities. What if the trader simply can't tell when a trade has a snowball's chance in hell of making a comeback to even? What if, heaven forbid, his internet connection lost it at the most inauspicious times? In either case, avoid this problem by setting your own stops for the trader. Don't though, stop those trades that are reasonable, stop only those that are beyond the outer rim of a realistic (to you) trading range.
Time to return to the question that began this article. Once you have done all you possibly can to limit draw down, my feeling is that any number over 35% of your total account equity is exorbitant. If you get into a set of circumstances where you are suffering a 50% or greater loss, it is well nigh impossible to ever recover from those losses without undertaking risk in the extreme. Think about it. Do the math. If you suffer a 50% loss, you need to make a 100% recovery just to break even.
When considering draw down you should also look at how much history is available on that trader. If he only has 3 weeks of history than chances are that his largest draw down is yet to come. If he has 50 or 100 weeks of history he has probably already hit some rough patches and you can get a better idea of how rough the rough patches are for that particular trader.
Do not just let go once you have selected your trader. You must constantly monitor his activity on both live and demo accounts. Should his draw down get crazy, it is undoubtedly time to reappraise your situation with him and perhaps delete him from your portfolio completely.
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