What are the Traditional Methods of Commodity Trading Risk Management?

Commodity Trading Risk & Money Management in Tutorial

In any business, in order to make a profit a trader 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 commodity online 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 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.

If you have $10,000 commodity trading capital & you make a loss in a single commodity trade of $500, then your commodity draw down 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 example if you have $10,000 commodity trading 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 trading maximum draw-down 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 commodity trading reports using MT4 commodity platform: Generate Commodity Trading Reports on MT4 Guide - Commodity Trading Position Management Commodity Strategies - Risk Management Commodity Trading Techniques in Trading Commodity

Commodity Trading Risk & Money Management in Trading Tutorial

The commodities trading example illustrated and shown below shows the difference between risking a small percent of your commodity capital compared to risking a higher percent. Good Commodity Risk Management in Intraday Trading PDF 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 - Commodity Risk Management in Intraday Trading Tutorial - Commodity Trading Risk & Money Management in Trading Tutorial

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 commodities trading.

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 Commodity Risk Management in Intraday Trading Tutorial 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 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 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 commodity trading capital.

Concept of Break Even - Commodity Trading Position Management Strategies

Commodities Trading Account Equity & Break Even - What are the Traditional Methods of Commodity Risk Management? - Commodity Trading Position Management Strategies

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 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 trading capital in each trade so that you can survive your losing streaks and avoid a large drawdown 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 trade order.

Effective Commodities Trading Risk Management

Effective commodity trading risk management requires controlling all the risks in commodities trading & a trader should create a money management commodity system & a money management commodity trading plan. To be in commodity trading or any other business you must make decisions involving some risk. All commodity trading factors should be analyzed to keep risk to a minimum & use the above commodity money management tips on this article - Commodity Position Management Strategies.

Ask yourself? Some Commodity Trading Tips

1. Can the commodity risks to your commodity trading activities be identified, what forms do they take? & are these clearly understood and planned for in your commodity trading plan? 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've a money management strategy & a commodity trading plan? have you read about this learn commodity trading tutorial which is well covered & discussed here on this learn commodity trading 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 commodity trading strategy or not? Have you read about 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 and what impact could they have on your commodity profits margins & your commodity account margin requirements?

6. Over what trading time periods do the commodity 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 techniques 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 addressed adequately, to ensure that you make and keep your commodity trading profits.