Reply To: XM copy trading ‘drawdown’ meaning
Don’t get hung up on win rate.
I’ve copied many high win rate strategies on many platforms, but often these strategies ditch stop-loss orders. This means they hold onto losing trades hoping the price will bounce back.
Sure, winning a lot of trades sounds good, but what if a few big losses wipe out all your small wins? Effective risk management, which includes stop-losses and position sizing, is key to surviving in the long run.
When copy trading, here’s what you should really focus on:
Drawdown: This refers to the biggest decline (equity and balance) a strategy experiences from a peak. A strategy with a high win rate but big drawdowns can be riskier than one with a lower win rate but smaller drawdowns.
Risk-Reward Ratio (RRR): This compares the potential profit to the potential risk on each trade. Even a strategy with a lower win rate can be profitable if the wins are much bigger than the losses. For instance, a 30% win rate strategy with a 3:1 RRR could be better than a 70% win rate strategy with a 1:1 RRR.
Focus on these metrics to find a strategy that balances potential gains with managing risk. Win rate is for vanity only and doesn’t guarantee long-term success.