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Managing Drawdowns

A drawdown is the process of your budget getting smaller after you make one or several losing trades.

Drawdowns may sound bad — but they’re really a normal part of trading crypto.

Look at it this way. If you’re winning half your trades while using stop-loss orders to lock in profits and minimize losses, you’re going to do well in the long run.

At the same time, your account will spend a lot of time with a negative balance — even if it’s just 1, 2 or 5% down. What matters is that you manage drawdowns effectively by:

  • Distinguishing between drawdowns that are necessary to make a profit, and ones resulting from ineffective trading strategies.
  • Knowing how to manage productive and unproductive drawdowns.

Let’s start by covering the first point.

Productive drawdowns

Statistically, a trader with a 70% win rate has a 37% chance of seeing 4 consecutive losing trades in a 50-win cycle. That’s not our opinion; this is a mathematical fact.

Think about that statistic. Even if you win 7 in 10 trades — an extraordinary accomplishment that means you’re an incredibly sharp trader — you’re still going to see 4 or more consecutive losing trades most weeks.

These kinds of drawdowns are fine. Every trader goes through them. What matters is controlling your losses, remembering your trading strategy and enforcing it with stop loss orders.

Unproductive drawdowns

Some drawdowns usually last a lot longer than a few consecutive losing trades — and, if left unchecked, can destroy your equity. If you’re in an unproductive drawdown like this, it’s almost always necessary to look at your trading choices and strategy.

Some things you can do to stay in control during an unproductive drawdown are:

  1. Setting a maximum drawdown. This will help you avoid risking so much money that you can’t come back from your loss.
  2. Identifying and managing productive drawdowns. This will help you know when you should keep trading using your current strategy.
  3. Sitting out questionable trades. This is probably the best way to avoid long, unnecessary drawdowns that destroy your budget.
  4. Focusing on assets you know. Your experience with and understanding of tokens you’re familiar with will help you avoid unnecessary losses.

If you’d like more tips, check out our free Adara Academy series on drawdowns. We cover all of the above points in depth and add a few new ones inside.

In closing, drawdowns aren’t a problem in and of their own, but they can quickly spiral out of control, leading to significant losses and putting you out of the game for good.

Now that you know how to differentiate between productive and unproductive drawdowns, you’re well equipped to trade profitably.

Would you like to learn more about crypto trading? Сheck out our educational platform Adara Academy

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