Trading With Tools of Commodity Trading Risk Management
The Commodity Trading Risk Management Guide
In any business, so as to make profit one must learn how to manage risks. To make profits in commodity trading you need to learn about the various commodity money management strategies discussed on this learn commodity lesson web-site.
When it comes to online commodity trading, the risks to be managed are potential losses. Using commodity risk management rules won't only protect your commodity trading account but also make you profitable in long run.
What are Major Types of Commodities Trading Risks?
As commodity traders the number one risk in commodity trading is referred to as draw down - this is the amount of money you have lost in your commodities trading account on a single commodity trade transaction.
If you have $10,000 commodity capital and you make a loss in a single commodity trade transaction of $500, then your commodity draw down is $500 divided by $10,000 which is 5% draw down.
What are Major Types of Commodity Trading Risks?
This is the total amount of money you have lost in your commodities trading account before you begin making profitable commodities trades. For examples if you have $10,000 commodity capital & make 5 consecutive losing commodity trades with a total of $1,500 loss before making 10 winning commodities trades with a total of $4,000 profit. Then the commodity drawdown is $1,500 divided by $10,000, which is 15% maximum draw down.
Draw Down is $442.82 (4.40%)
Maximum DrawDown is $1,499.39 (13.56 %)
To learn how to generate the above reports using MT4 commodity trading platform: Generate Commodity Trading Reports on MT4 Guide - Trading With Tools of Commodity Risk Management - Commodity Trading Risk Management Calculator
The Commodity Risk Management Tutorial
The example displayed below shows the difference between risking a small percentage of your commodity capital compared to risking a higher percentage. Good Commodity Trading Risk Management Strategy principles requires you as an investor not to risk more than 2% of your total commodity account equity on any one single commodity trade.
Commodity Percent Risk Method
2% & 10% Commodities Trading Money Management Rule - Commodity Risk Management Strategy - The Commodity Trading Risk Management Guide
There is a big difference between risking 2% of your commodity trading account equity compared to risking 10% of your equity on a single commodity trade transaction.
If you happened to go through a losing streak & lost only 20 commodities trades in a row, you would have gone from beginning commodity account balance of $50,000 to having only $6,750 left in your commodities account if you risked 10% on each commodity trade transaction. You would have lost over 87.50% of your commodity trading account equity.
However, if you risked only 2% you would have still had $34,055 in your commodity trading account which is only a 32 % loss of your total commodity trading account equity. This is why it is best to use the 2% risk management strategy in commodities trading.
Difference between risking 2 % and 10 % on a single commodity trade transaction 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 trade transactions that is less than what you would have in your commodities account if you risked only 2% of your commodities trading account & lost all 20 commodities trade transactions.
The point is that you want to setup your Commodity Trading Risk Management Strategy rules so that when you do have a loss making period, you will still have enough commodity trading capital to trade next time.
If you lost 87.5% of your commodity trading capital you would have to make 640% profit to get back to breakeven.
As compared to if you lost 32 % of your commodity trading capital you would have to make 47% profit to get back to breakeven. To compare it with the commodity example 47 % is much easier to break-even than 640% is.
Chart below shows what percent you would have to make so that you get back to break-even if you were to lose a certain percent of your commodity trading capital.
Concept of Break Even - Trading With Tools of Commodity Trading Risk Management
Commodities Trading Account Equity & Break Even - What are Major Types of Commodity Trading Risks? - Trading With Tools of Commodity Trading Risk Management
At 50% commodity drawdown, one would have to earn 100 % on their invested commodity trading capital - a feat accomplished by less than 5% of all commodity traders worldwide - just to break-even 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 what is called to "breakeven" - which means - get back to your original commodity trading account balance that you deposited.
The more money you lose, the harder it is 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 Trading Money Management is about only risking a small percent of your commodity capital in each trade transaction so that you can survive your losing streaks and avoid a big draw down on your commodities trading account.
In commodity trading, traders use commodity stop-loss trading orders which are put so as to minimize commodity losses. Controlling risks in commodity trading involves putting a commodity stop loss order after placing an new commodity order.
Effective Commodities Trading Risk Management
Effective commodity trading risk management requires controlling all risks in trading & a trader should create a money management commodity system & a money management commodity plan. To be in commodity trading or any other business you must make decisions involving some risk. All commodity trading factors should be interpreted to keep risk to a minimum & use the above commodity money management tips on this article - Trading With Tools of Commodity Trading Risk Management.
Ask yourself? Some Tips
1. Can the risks to your commodity investing activities be identified, what forms do they take? and are these clearly understood and planned for? All the commodity risks should be taken care of in your commodity trading plan.
2. Do you grade the trading risks encountered by you when commodity trading in a structured way? - Do you have a commodity trading plan? have you read about this learn commodity trading topic which is thoroughly covered discussed here on this learn commodity web site.
3. Do you know maximum potential trading risk of each exposure for each trade which you place?
4. Are trading decisions made on the basis of reliable & timely market information & based on commodity trading strategy or not? Have you read about commodity trading systems here on this learn commodity website tutorial lessons.
5. Are the commodity risks large in relation to the turnover of your invested commodity capital and what impact could they have on your commodity profits margins & your commodity trading account margin requirements?
6. Over what trading time periods do the trading risks of your commodity trading activities exist? - Do you hold 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 the ways in which your commodity trading risks can be reduced or hedged & what it would cost in terms of profit if you didn't include these stipulated measures to reduce potential loss, and what impact would it make to any up side of your commodity profit?
9. Have your commodity money management rules been adequately formulated, to ensure that you make and keep your commodity trading profits.
