Draw Down & Maximum Draw-down

In business so as to earn and make a profit one must learn to mange risks. A gold trader must learn & understand how to manage the trading risks: Question, I am a Beginner(I am very green), What are the risks in Trading? - DRAWDOWN. To make profits on online trading you need to learn about the different risk management strategies that are discussed on this learn XAUUSD lessons web site.

In trading, the risk to be managed are potential trading losses. Using equity management guidelines will not only protect your 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 trade positions 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.

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 MetaTrader 4 platform: Generate Reports on MT4 Guide Lesson

XAU/USD 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 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

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 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 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 risks. A trader should come up with a clear money management system and a trading plan. To be in XAU/USD 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.

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