At Nostro, we believe that understanding how drawdown is calculated is essential for effective trading and risk management. In this article, we will explain how drawdown works and provide examples to help you better understand it.
Understanding Daily Drawdown:
Daily drawdown is the maximum amount of money that your account can lose in a single day. It is an important metric to monitor as it helps you manage your trading effectively and mitigate risks.
How is Daily Drawdown Calculated?
At Nostro, we have specific guidelines for calculating daily drawdown:
Maximum Daily Drawdown: We maintain a maximum daily drawdown of 5% - 6% for our paid challenge accounts and 3% for Free $5,000 accounts.
Calculation Basis: Daily drawdown is calculated based on the higher of either your Balance or Equity at 5PM ET.
Example 1:
Let's say you have a $5,000 account with an open position in profit of $40 that you hold overnight through rollover. The daily drawdown mark for the next day will be $4,889 (because your equity was higher than your balance, so daily drawdown was calculated based on equity). If your position then moves from +$40 profit to break even ($0), this will result in a drawdown of $111 for the rest of the day until the next rollover. As your daily drawdown was calculated based on 3% from $5,040 (because your equity ($5,040) was higher than your balance ($5,000) at the time of rollover), this situation emphasizes the importance of setting stop losses and trading with appropriate risk.
Example 2:
Now, imagine you have a $5,000 account with an open position in a loss of -$40 overnight. The daily drawdown mark for the next day will be $4,850 (based on balance). If your position then moves from a loss of -$40 to -$120 and closes, resulting in a drawdown of $30 for the rest of the day. As your daily drawdown was calculated based on 3% from $5,000 (balance higher than equity), it underscores the need for caution when holding trades overnight.
Important Considerations
Daily drawdown remains unchanged until 5PM ET, even if your simulated account balance increases throughout the day.
It's crucial to check your dashboard for daily drawdown status and limits regularly.
If unsure, avoid leaving trades open through rollover to mitigate risks effectively.
Understanding how daily drawdown is calculated empowers traders to make informed decisions, manage risks proactively, and enhance their trading experience on our platform. If you have any further questions or need assistance, don't hesitate to reach out to our support team.
Understanding Maximum Drawdown:
Maximum drawdown is the maximum amount of money that your account can lose in a at any point in time. It is an important metric to monitor as it helps you manage your trading effectively and mitigate overall risk.