Draw Down and Maximum Draw-down

In business in order to make a profit a trader must learn how to manage the risks. To make profits in trading you need to learn about the various risk management strategies discussed on this learn XAUUSD lesson web site.

When it comes to trading, the risks to be managed are potential trading losses. Using money management rules 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 known as draw-down - this is the amount of money you've lost in your account on a single transaction.

If you have $10,000 capital & you make a loss in one trade of $500, then your drawdown is $500 divided by $10,000 which is 5% draw-down.

Maximum Draw-down

This is the total amount of money you have lost in your account before you start making profitable trades. For examples if you have $10,000 capital & make 5 consecutive losing trade transactions with a total of $1,500 loss before making 10 winning trades with a total of $4,000 profit. Then the draw-down is $1,500 divided by $10,000, which is 15 % maximum draw down.

DrawDown is $442.82 (4.40%)

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

To learn how to generate the above reports using MetaTrader 4 platform: Generate Reports on MT4 Tutorial

Gold Money Management

The example displayed below shows the contrast between risking a small percentage of your capital compared to risking a higher %. Good investment principles requires you as a investor not to risk more than 2% of your total account equity.

Percentage Risk Technique

2 percent and 10 percent Risk Rule

There is a large contrast between risking 2% of your equity compared to risking 10% of your equity on one transaction.

If you happened to experience a losing streak and lost only 20 trades in a row, you would have gone from beginning trading account balance of $50,000 to having only $6,750 left in your account if you risked 10 % on each trade position. You would have lost over 87.5 % of your equity.

However, if you risked only 2 % you would have still had $34,055 which is only a 32% loss of your total account equity. This is why it is 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 after 20 losing trades.

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

The point is that you want to setup your rules so that when you do have a loss making period, you'll still have enough capital to trade next time.

If you lost 87.50 % of your trading capital you'd have to make 640% profit to get back to break-even.

As compared to if you lost 32 percent of your capital you would have to make 47 % profit to go back to break even. To compare 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

Account Equity & Break Even

At 50% draw-down, a trader would have to earn 100 % on their invested capital - a task accomplished by less than 5% of all traders worldwide - just to break-even on an-accounta-trading-account with a 50% loss.

At 80% draw-down, a trader must quadruple their account equity just to take back to its original equity. 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 is to make it back to your initial account size.

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

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

In XAUUSD, traders use stoploss orders which are placed in order to reduce losses. Controlling risks it involves putting a stop order after placing an order.

Effective Risk Management

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

Ask yourself? Some Tips

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

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

3. Do you know the maximum potential risk of each 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 tutorial tutorials.

5. Are the risks big in relation to the turnover of your invested capital and what impact could they have on your profits margins & your margin requirements?

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

7. Are the exposures a one-off or are they recurring?

8. Do you know enough about the ways in which your risks can be reduced or hedged and 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 profit?

9. Have your rules been adequately addressed, to ensure that you make & keep your profits.