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Monday, February 4, 2008

Challenge Accounts: How to deal with Drawdown?

Challenge Accounts:

Sharebuilder Balance: $131.14

optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

We mentioned some time ago that drawdown is a reality, and every account must be prepared for it.

What about the Challenge Accounts? We just said that every account must be prepared for it. How does drawdown relate to the low-funded, and what strategies need implemented in a challenge account to deal with drawdown? This is something I discussed within the following video:



This is precisely why the Challenge accounts did not trade again, until Rule #2 more than doubled the account equity.

A trade here and there won't hurt as long as the long as the regular contributions to the account are greater than the single trade that the person is taking on. In other words, REWARD your account with increased capital, for every RISKED trade you have. Sound familiar? Yeup. Risk / reward. Of course, that's just to get to a point where you can trade actively. Risk / Reward ratios actually relate to rewards from trades. Not just pouring money into an account. But these are the sorts of things you have to think about - if you are in the low-funded situation.

So for the Challenge Accounts? This means at the current moment I can withstand a Consecutive Trade Drawdown of 1, before I have to hold off on trading again, until the capital has covered twice my loss.

* * *

Sharebuilder Balance: $131.14
optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Total Trades and Investments: 1
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 1
Average Drawdown: $86.51
Accuracy Rate: N/A
Average Reward: $0.00
Risk Reward Ratio: N/A

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders.

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