Trading Commodity Risk Management and Money Management Methods
Trading Commodity Risk Management Strategies
In any business, so as to make profit a trader must learn how to manage the risks. To make profits in trading commodity you need to learn about the various commodity money management strategies discussed on this learn trading commodity tutorial website.
When it comes to commodity trading, the risks to be managed are potential losses. Using commodity risk management rules won't only protect your commodity account but also make you profitable in long run.
What's DrawDown in Commodities Trading?
As commodity traders the number one risk in trading commodity trading also known as draw down - this is the amount of money you have lost in your commodities trading account on a single commodity trade.
If you have $10,000 commodity capital and you make a commodity loss in a single commodity trade of $500, then your commodity drawdown is $500 divided by $10,000 which is 5% commodity draw down.
What is Maximum Commodity Trading Draw Down?
This is the total amount of money you have lost in your commodity account before you start making profitable commodities trades. For examples if you have $10,000 in trading commodity capital & make 5 consecutive losing commodity trades with a total of $1,500 commodity loss before making 10 winning commodities trades with a total of $4,000 commodity profit. Then the commodity drawdown is $1,500 divided by $10,000, which is 15% maximum commodity draw down.
Commodity DrawDown is $442.82 (4.4%)
Maximum Commodity Trading DrawDown is $1,499.39 (13.56%)
To learn how to generate the above in trading commodity reports using MT4 commodity platform: Generate Commodity Trading Reports in MT4 Guide - DrawDown Commodities Trading Risk Management Chart - DrawDown Commodity Trading Risk Management Calculation
Trading Commodities Risk Management Strategies
The in trading commodity example illustrated and shown below shows difference between risking a small percent of your commodity capital compared to risking a higher percentage. Good Trading Commodity Risk Management Strategies principles requires you as a trader not to risk more than 2% of your total commodity trading account equity on any one single commodity trade.
Commodity Percent Risk Method
2% & 10% Commodity Trading Money Management Rule - Trading Commodity Risk Management Strategies - How to Trade Management Strategies for Trading Commodity
There is a big difference between risking 2% of your commodity account equity compared to risking 10% of your equity on a single commodity trade.
If you happened to go through a losing commodity streak & lost only 20 commodities trades in a row, you would have gone from starting commodity account balance of $50,000 to having only $6,750 left in your commodities account if you risked 10% on each commodity trade. You would have lost over 87.5% of your commodity trading account equity.
However, if you risked only 2 % you would have still had $34,055 in your commodity account which is only a 32 % loss of your total commodity account equity. This is why it is best to use the 2% risk management strategy in trading commodity.
Difference between risking 2 % & 10 % on a single commodity trade is that if you risked 2 % you would still have $34,055 in your commodity trading account after 20 losing trades.
However, if you risked 10 % you would only have $32,805 in your commodity trading account after only 5 losing commodity trades that's less than what you would have in your commodities account if you risked only 2% of your commodities trading account & lost all 20 commodities trading transactions.
The point is you want to setup your Trading Commodity Risk Management Strategies rules so that when you do have a loss making period, you will still have enough in trading commodity capital to trade next time.
If you lost 87.5% of your in trading commodity capital you would have to make 640% profit to get back to breakeven.
As compared to if you lost 32 % of your in trading commodity capital you would have to make 47% profit to get back to the break-even. To compare it with the commodity examples 47 % is much easier to breakeven than 640 % is.
The chart below shows what percentage you would have to make so that you get back to breakeven if you were to lose a certain percentage of your in trading commodity trading capital.
Concept of Break Even - DrawDown Commodity Risk Management Chart
Commodities Trading Account Equity & Break Even - Trading Commodity Risk Management and Commodities Money Management Methods - DrawDown Commodity Risk Management Chart
At 50% commodity drawdown, one would have to earn 100 % on their invested commodity capital - a feat accomplished by less than 5% of all commodity traders worldwide - just to breakeven on a commodity account with a 50% loss.
At 80% commodity draw down, one must quadruple their commodity trading equity just to bring it back to its original equity. This is known as to 'breakeven' - which means - get back to your original commodity trading account balance that you started with.
The more money you lose, the harder it's to make it back to your original commodity trading account size.
This is why as a trader you should do everything you can to PROTECT your commodity trading account equity. Do not accept to lose more than 2% of your commodity account equity on any 1 single commodity trade.
Commodity Money Management is about only risking a small percent of your commodity capital in each trade so that you can survive your losing streaks and avoid a large drawdown on your commodities trading account.
In trading commodity, traders use commodity stop-loss trading orders which are put so as to minimize commodity losses. Controlling risks in trading commodity involves putting a commodity stop loss order after placing an new commodity trade order.
Effective Commodities Trading Risk Management
Effective in trading commodity risk management requires controlling all the risks in trading commodity and a trader should create a money management commodity system and a money management in trading commodity plan. To be in trading commodity or any other business you must make decisions involving some risk. All in trading commodity factors should be analyzed to keep risk to a minimum & use the above commodity money management tips on this article - DrawDown Commodity Trading Risk Management Chart.
Ask yourself? Some Commodity Trading Tips
1. Can the commodity risks to your in trading commodity activities be identified, what forms do they take? and are these clearly understood and planned for in your in trading commodity plan? All the commodity risks should be taken care of in your in trading commodity plan.
2. Do you grade the trading risks encountered by you when in trading commodity in a structured way? - Do you have a money management strategy & a in trading commodity plan? have you read about this learn in trading commodity topic which is well covered explained here on this learn trading commodity website for beginners.
3. Do you know the maximum potential risk of each exposure for each trade which you place?
4. Are trading decisions made on the basis of reliable and timely commodity market information & based on in trading commodity strategy or not? Have you read about in commodity systems on this learn commodity web site.
5. Are the commodity risks large in relation to the trade turnover of your invested commodity capital & what impact could they have on your commodity profits margins & your commodity account margin requirements?
6. Over what trading time periods do the in trading commodity risks of your in trading commodity activities exist? - Do you hold in trading commodity trade positions long-term or short-term? what type of commodity trader are you?
7. Are the exposures in trading a one off or they are recurring?
8. Do you know enough about techniques in which trading commodity risks can be reduced or hedged & what it would cost in terms of profit if you didn't include these measures to reduce potential loss, and what impact would it make to any up side of your commodity profit?
9. Have your commodity trading money management rules been addressed adequately, to ensure that in commodity trading you make and keep your commodity profits.
Trading Commodity Risk Management and Commodity Money Management Methods - DrawDown Commodities Trading Risk Management Chart - DrawDown Commodity Trading Risk Management Calculation
