When you’re looking for a third party signal provider, one of the first things that you need to look at is their maximum draw down. This is the maximum amount lost between an extreme peak and an extreme valley. This number also includes open positions but does not take into account margin required to keep you out of a margin call. Inevitably the question comes: How much draw down is too much? The answer is like many trading questions. It depends. There are a lot of factors that come into play when answering this question. Obviously a person with a 50k account could tolerate more draw down than a person with a 5k account. Another person with a 1k account could withstand even less. So aside from your account size, what else do we have to think about?

Besides the size of the draw down number are the events that formulated it. A trader with a draw down of a size so high it makes you nervous but otherwise seems a successful one, you need to take a look at the number of positions he has open at one time. If he opens 5 trades on whatever pair at one time; you can immediately reduce his record of draw downs by 5. The trader who limits the number of open trades can sizably cut down the overall draw down.

Sometimes you will find a trader who has a great track record aside from one major meltdown where a single trade ran out of control for days unchecked. This will produce an abnormal draw down in relation to the trader’s real ability. He may be the kind of guy who can’t recognize when a trade has no chance of coming back to even. He may also be a guy who lost his internet connection at an inopportune time once or twice. Either way you can keep this trader from doing this to your account by setting your own stops for him. Just make sure that you only stop out his trades that are well out of a realistic trading range.

Now that we’re half way down the page lets revisit our original question. After doing anything and everything you can to limit draw down, I would say that anything over 35% of your entire account equity is just too much. Once you start to get into a situation where you are losing 50% or more it is very tough to ever recover without taking extreme risks. If you lose 50% you need to make 100% just to get back to even.

Historical information on the trader is another important consideration to take into account. A lengthy history being available can illustrate to you just how the trader handles rough seas in the trading arena. You want to know this because there will be rough seas in your trading future and you want a steady captain at the helm.

You must constantly monitor your traders on all of your accounts, whether live or demo. Should any draw down run rampant, you will need to reevaluate and possibly delete the trader from your active portfolio.

To learn more about forextradingsystems.com">Forex Trading Systems visit forextradingsystems.com/Forex_Articles.html">Automated Forex Trading Systems.

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