Draw-down and Maximum Draw-down - Capital Management in Gold Trading
In a business in order and so as to earn profit one must learn and understand how to manage the risks. To earn and make profits in Gold trading you need to learn about the different money management strategies discussed on this learn Gold trading web site.
When it comes to Gold trading, risk to be managed are the potential trading losses. Using equity management guidelines won't only protect your trading account but also make you profitable over the long run.
Draw-down
As Gold traders the number one risk in Gold trading is known as draw-down - this is the amount of money you have lost on your account on a single Gold trade transaction.
If you have $50,000 capital & you accrue a loss in a single trade of $500 dollars, then your draw down is $500 divided by $50,000 dollars which's 1 percentage draw-down.
Maximum Draw-down
This is the total amount of money you have lost on your trading account before you start earning and making profitable trades. For illustration if you have $50,000 capital and make five consecutive losing positions with an overall total of $2,500 loss before making 10 winning trade positions with an overall total of $5,000 dollars profit. Then the draw down is $2,500 divided by $50,000 dollars, which is 5 % maximum draw down.
Draw Down on the illustration put on display above is $442.82 dollars (4.4 %)
Maximum Draw Down is $1,499.39 (13.56%)
To know how to generate and get above trade reports using MetaTrader 4 platform software: You can search on how to generate reports on MT4 Tutorials and Lessons.
Equity Management Methods
The illustration laid-out below shows difference between risking a small % of your capital compared and analyzed to risking a higher percent of you trading capital. Good trading principles require you as an investor or a trader not to risk more than 2% of your total account equity on any one single trade position.
Percentage Risk Method
2% and 10% Risk Rule - Gold Money Management Principles
In trading, there's a big difference between risking 2% of your account equity compared and analyzed to risking 10% of your account equity on a single trade.
If you happened to go through a losing streak when trading Gold and lost only 20 trade transactions on a row, you would have gone from starting 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 87.5% of your account equity.
However, if you risked only 2 % when placing the trade positions, you would still have had $34,055 dollars which's only a 32% loss of your total equity.
This is why it's best to use the 2% risk management strategy
The difference between risking 2% and 10% is that if you risked 2% per every trade you'd still have $34,055 after 20 losing trade positions.However, if you risked 10% per trade you'd 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 & lost all 20 trades.
The point is that you want to setup your equity management guidelines so that as when you do get a loss making downtime period, you will still have enough capital to trade the next time.
If you lost 87.5% of your account capital you'd have to make 640% profit on your remaining balance just to go back to break-even.
As when compared & analyzed to if you lost 32% of your capital you would have to make 47% profit on your remaining balance just to go back to break-even. To compare and analyze this with the above illustration, 47% maximum draw down is much easier to break-even than 640 % maximum draw-down is.
The chart below shows what percentage of your account equity you would have to make so as to go back to break-even if you were to lose a certain % of your capital.
Concept of BreakEven
Trading Account Equity & Concept of BreakEven
At 50% draw-down, a xauusd trader would have to earn 100% on their remaining capital - a feat accomplished by less than 5 % of all online traders world wide - just to break-even on a account with a 50 % loss.
At 80% draw-down, a gold a trader must quadruple their trading equity just to bring and take it back up to the original equity. This is what is known as "break-even" i.e. Get back to your original account balance that you deposited after incurring a draw down.
The more you lose, the harder it is to make it back to your initial equity.
This is the explanation why as a trader you should do everything you can to PROTECT your account equity. Do not accept to lose more than 2% of your equity on any 1 single trade.
Money management is about only risking a small percentage of your capital in each transaction so that you as a trader can survive your losing streaks and avoid a large draw-down on your account.
In trading, traders use stop losses which are placed in order and so as to cap losses. Controlling risks involves putting a stop loss after opening a trade order.
Effective Money Management
Effective risk management requires controlling all the risks. A trader should come up with a clear equity management system and a trading plan. To be in XAU USD business or in any other business you must make some decisions that involve some type of risk. All factors and aspects should be considered to keep trading risk to a minimum when trading XAUUSD online & ensure you use the above tips on this tutorial.
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