Understanding Drawdown and Maximum Drawdown in Bitcoin Trading for Effective Money Management

In a business in order to earn profit one must learn & understand how to manage the risks. To earn and make profits in Bitcoin trading you as a trader need to learn about the different equity management strategies explained on this learn BTC/USD Crypto trading web site.

In BTC/USD Cryptocurrency trading, the primary risk concern is managing potential trading losses. Employing sound money management principles will not only safeguard your Bitcoin account but also contribute to long-term profitability.

Draw-down

As Bitcoin traders the number one risk in Bitcoin trading is known as draw-down - this is the sum of money you have lost on your account on one Bitcoin trade.

If you have $50,000 capital & you make a loss in a single transaction of $500 dollars, then your drawdown is $500 divided by $50,000 dollars which is 1 percent draw down.

Max Draw-down

This is the overall total sum of money you as a btc usd trader have lost on your Bitcoin account before you start making profitable positions. For example if you have $50,000 capital & make 5 consecutive losing trading positions with a total of $2,500 dollars loss before making 10 winning positions with a total of $5,000 profit. Then the drawdown is $2,500 dollars divided by $50,000, which is 5 % maximum drawdown.

Bitcoin Drawdown vs Maximum Drawdown – Managing Your Crypto Money

Draw Down in the example above is $52.01 (0.53%)

Maximum Draw Down is $52.01 (0.53%)

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Funds Management Methods

The example presented here highlights the difference between risking a small part of your trading money versus risking a bigger part of your trading money. Good rules say that you, as an investor or trader, shouldn't risk more than 2% of your total money on just one BTCUSD trade.

% Risk Method

Bitcoin drawdown vs maximum drawdown? Money rules help manage crypto trades.

2 percent & 10 percent Risk Rule - Bitcoin Money Management Rules

In trading, there is a big/large difference between risking 2 percent of your account equity compared & analyzed to risking 10% of your account equity on a single Bitcoin trade.

If you had a losing streak while trading Bitcoin and only lost 20 trades in a row, you would have risked 10% on each trade and ended up with just $6,750 in your Bitcoin account after starting with a balance of $50,000. More than 87. 5% of your Bitcoin assets would have been lost.

If you risk just 2% per Bitcoin trade, you'd still have $34,055 after 20 losses. That's only a 32% drop in your total funds.

This is why it's best to use the 2 percent risk management method

The contrast between risking 2% and 10% when trading Bitcoin online is that if you risked 2% per every trade you'd still have $34,055 after 20 losing trades. However, if you risked 10% per trade you would only have $32,805 after only 5 losing trades & that's less than what you'd have had if you risked only 2 % of your trading account and lost all 20 trades.

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If you lost 87.5% of your account capital you'd have to make 640% profit in your remaining balance just to go back to break-even.

As when compared to if you lost 32% of your trade capital you'd have to make 47% profit in your remaining balance just to go back to break-even. To compare and analyze this with the above example, 47% maximum drawdown is much easier to break-even than 640% maximum draw-down is.

Chart below shows what percentage of your account equity you'd have to make so as to go back to break-even if you were to lose a certain percentage of your Bitcoin capital.

Concept of Break-Even

Bitcoin Drawdown Basics - Max Drawdown and Money Management in Crypto

Trading Account Equity and Concept of Break Even

With a 50% drawdown, a BTC/USD trader would need to generate a 100% return on the remaining capital just to break even. This is a feat achieved by less than 5% of all online traders globally.

Following an 80% drawdown, a trader faces the necessity of quadrupling their Bitcoin account's equity just to recuperate losses and return to the initial equity level. This recovery state is commonly referred to as "break even," meaning achieving the original deposited account balance after incurring a drawdown.

The more funds you lose, the more difficult it becomes to return to your initial trading capital.

As a trader, it's crucial to protect your trading account equity. It's advisable not to accept a loss exceeding 2 percent of your account equity on any single Bitcoin trade.

Effective money management involves risking a small percentage of your trading capital on each Bitcoin transaction. This strategy helps you withstand losing streaks and prevents significant drawdowns in your account.

In BTC USD CryptoCurrency trading, traders use stop loss orders that are placed so as to minimize losses. Controlling risks involves setting a stop loss order after opening a trade order.

Effective Equity Management

Good risk management means handling all trading risks. Set up a clear plan for money management and bitcoin trades. In bitcoin trading or any business, you must face some risks and make choices. Measure every part to keep risks low when trading bitcoin online. Use the tips above for bitcoin crypto trades.

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