Trade Forex Trading

Draw Down and Maximum Draw-down

In business so as to earn a profit a gold trader must learn & understand how to manage the risks. To make profits in trading you need to learn about the different risk management strategies discussed on this learn XAUUSD lesson web site.

In trading, the risk to be managed are potential trading losses. Using equity management guidelines will not only protect your trading account but also make you profitable in the long run.

Draw-down

As traders the number one risk is referred to as draw-down - this is the amount of money you have lost on your account on a single transaction.

If you've got $10,000 capital & you accrue a loss in one trade of $500 dollars, then your drawdown is $500 divided by $10,000 which is 5% draw down.

Max Draw-down

This is the overall total sum of funds you've lost on your account before you start making profitable trades. For illustration, if you as a trader 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 dollars profit. Then the draw-down is $1,500 dollars divided by $10,000, which's 15 percentage maximum draw down.

Relative Draw Down & Maximum Draw Down in XAUUSD - Draw Down in Examples Described

Draw-Down is $442.82 (4.40%)

Maximum Draw Down is $1,499.39 (13.56 percentage)

To learn and know how to get and generate the above trading reports using MT4 platform: Generate Reports on MT4 Guide

XAUUSD Capital Management

The example shown & displayed below shows the contrast between risking a small percentage 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.

% Risk Technique

2% and 10% Risk Per Trade Strategy in Money Management - Draw Down in XAUUSD Described

2 percent and 10 percent Risk Rule

There is a big contrast between risking 2 % of your equity compared & analyzed to risking 10 % of your capital on a single transaction.

If you happened to experience a losing streak and lost only 20 trade positions in a row, you would have gone from a starting trading equity balance of $50,000 dollars dollars to having only $6,750 dollars left in your account if you as a xauusd gold trader risked 10 % on every trade. You would have lost over 87.5% of your equity.

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

Difference between risking 2% and 10 % is that if you risked 2% you'd still have $34,055 dollars after 20 losing trade transactions.

However, if you risked 10 % you would only have $32,805 dollars after only 5 losing trade positions that's less than what you'd have if you risked only 2% of your trading account and lost all 20 trade positions.

The point is that you as a xauusd gold trader want to setup your trading rules so that when you do get a loss making period downtime, you will still have enough equity to open a trade next time.

If you lost 87.50 % of your trading capital you would have to make 640 % profit to go back to break-even.

As compared & analyzed to if you lost 32 percentage of your capital you'd have to make 47% profit to go back to the break-even. To compare and analyze it with the example 47% is a lot easier to break even than 640 % is.

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

Concept of Break-Even

What is Draw Down in XAUUSD and What is Maximum Draw Down in XAUUSD Trading? - Draw Down in XAUUSD Guide

Account Equity & BreakEven

At 50% draw down, a gold trader would have to earn 100% on their invested capital - a feat which is accomplished by less than 5% of all traders globally - just to break-even on an account with a 50 % loss.

At 80% draw-down, a trader must quadruple their account equity just to bring and take it back to its initial equity level. This is what is called to "breakeven" i.e. Get back to your original trading account balance which you deposited.

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

This is the reason why as a gold trader you should do everything you as a trader can to PROTECT your capital. Do not accept to lose more than 2 percent of your equity on any 1 single trade.

Xauusd risk management is about only risking a small percentage of your trading capital in each trade so that you as a trader can survive your losing streaks and avoid a large draw down on your account.

In XAUUSD, traders use stop loss orders which are placed in order and so as to cap losses. Controlling risks it involves placing a stoploss order after placing an order.

Effective Money Management

Effective risk management requires controlling all the trading risks. A trader should come up with a clear money management system and a trading plan. To be in XAUUSD or in any other biz you must make decisions involving some risk. All aspects should be measured to keep risk to a minimum & use the above tips on this guide.

Ask yourself? Some Tips

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

2. Do you as a trader grade the risks faced by you when trading in a structured way? - Do you've a trading plan? - have you read about this tutorial course which is extensively covered here on this Web Site.

3. Do you as a trader know the max potential trading risk of each market exposure for each transaction that you place?

4. Are decisions made on the basis of reliable & timely information and based on a strategy or not? Have you read about systems here on this web site tutorials.

5. Are the risks big relative to the turnover of your invested capital and what impact could they have on your trading profit margins and your margin requirements?

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

7. Are thee exposures of your trade activities a one off or recurring?

8. Do you as a trader know enough about methods in which your risks can be reduced or hedged & what it would cost if you did not include these measures to reduce potential loss, and what impact it would make to any upside of your trading profit?

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

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