Draw Down and Maximum Draw-down

In business in order to make profit a trader must learn how to manage the risks. To make profits in trading you need to learn about the various commodity money management strategies discussed on this learn Commodity Trading tutorial website.

When it comes to trading, the risks to be managed are potential trading losses. Using commodity trading money management rules will not only protect your commodity account but also make you profitable in long run.

Draw-down

As traders the number one risk is known as draw-down - this is the amount of money you have lost in your commodities trading account on a single commodity trading transaction.

If you have $10,000 capital & you make a loss in a single trade of $500, then your draw-down is $500 divided by $10,000 which is 5% draw-down.

Maximum Draw-down

This is the total amount of money you have lost in your commodities trading account before you start making profitable trades. For example if you have $10,000 capital & make 5 consecutive losing trades with a total of $1,500 loss before making 10 winning trades with a total of $4,000 profit. Then draw-down is $1,500 divided by $10,000, which is 15 % maximum draw down.

DrawDown is $442.82 (4.4%)

Maximum DrawDown is $1,499.39 (13.56%)

To learn how to generate the above reports using MT4 platform: Generate Reports in MT4 Guide

Commodities Trading Money Management

The examples shown below shows the difference between risking a small percent of your capital compared to risking a higher percent. Good investment principles requires you as a investor not to risk more than 2% of your total account equity.

Percentage Risk Method

2% and 10% Risk Rule

There is a big difference between risking 2% of your equity compared to risking 10% of your equity on a single transaction.

If you happened to go through a losing streak & lost only 20 trades in a row, you would have gone from a beginning account balance of $50,000 to having only $6,750 left in your trading account if you risked 10 % on each trade. You would have lost over 87.50% of your equity.

However, if you risked only 2 % you would have still had $34,055 which is only a 32 % loss of your total equity. This is why it is best to use the 2% risk management strategy

Difference between risking 2 % & 10 % is that if you risked 2% you would still have $34,055after 20 losing trades.

However, if you risked 10 % you would only have $32,805 after only 5 losing trades that is less than what you would have if you risked only 2 % of your account & lost all 20 trades.

The point is you want to setup your rules so that when you do have a loss making period, you will still have enough capital to trade next time.

If you lost 87.5% of your capital you would have to make 640% profit to get back to breakeven.

As compared to if you lost 32 % of your capital you would have to make 47% profit to get back to break-even. To compare it with the example 47 % is much easier to break-even than 640 % is.

The chart below shows what percentage you would have to make to get back to break even if you were to lose a certain percentage of your capital.

Concept of Break Even

Account Equity & Break Even

At 50% drawdown, one would have to earn 100 % on their invested capital - a feat accomplished by less than 5% of all traders worldwide - just to break even on an account with a 50% loss.

At 80% draw-down, one must quadruple their equity just to bring it back to its original equity. This is what is called to "break-even" i.e. Get back to your original account balance which you deposited.

The more you lose, the harder it's to make it back to your original account size.

This is the reason why you should do everything you can to PROTECT your equity. Do not accept to lose more than 2% of your equity on any 1 single transaction.

Commodity money management is about only risking a small percent of your capital in each transaction so that you can survive your losing streaks & avoid a large draw-down on your trading account.

In Commodity Trading, traders use stop loss orders which are put in order to minimize losses. Controlling risks it involves putting a stop loss order after placing an order.

Effective Risk Management

Effective risk management requires controlling all risks. One should come up with a clear commodity trading money management system and a plan. To be in Commodity Trading or any other business you must make decisions involving some risk. All factors should be measured to keep risk to a minimum & use the above tips on this article.

Ask yourself? Some Tips

1. Can the risks to your investing activities be identified, what forms do they take? & are they clearly understood & planned for? All the risks should be taken care of in your Commodity Trading plan.

2. Do you grade the risks faced by you when trading in a structured way? - Do you have a trading plan? - have you read about this topic which is thoroughly covered discussed here on this Web Site.

3. Do you know the maximum potential risk of each exposure for each transaction that you place?

4. Are decisions made on basis of reliable and timely data and based on a strategy or not? Have you read about commodity systems here on this website guide lessons.

5. Are the risks big in relation to the turnover of your invested trading capital & what impact could they have on your profits margins & your margin requirements?

6. Over what time periods do risks of your trading activities exist? - Do you hold trade positions long-term or short-term? what type of trader are you?

7. Are the exposures a one-off or are they recurring?

8. Do you know enough about the ways in which your Commodity Trading risks can be reduced or hedged and what it would cost if you did not include these measures to reduce potential loss, and what impact would it make to any up side of your profit?

9. Have your rules been adequately addressed, to ensure that you make and keep your profits.