What are Major Types of XAUUSD Trading Risks?
Gold Risk Management Strategy
In any business, so as to make profit one must learn how to manage the risks. To make profits in xauusd you need to learn about the various xauusd money management strategies discussed on this learn xauusd guide website.
When it comes to online xauusd, the risks to be managed are potential losses. Using xauusd trading risk management rules will not only protect your xauusd account but also make you profitable in long run.
What is Draw Down in XAUUSD Trading?
As xauusd traders the number one risk in gold trading is referred to as draw down - this is the amount of money you have lost in your gold trading account on a single xauusd trading trade transaction.
If you have $10,000 xauusd capital & you make a loss in a single xauusd trade transaction of $500, then your xauusd drawdown is $500 divided by $10,000 which is 5% draw down.
What is Maximum Draw Down?
This is the total amount of money you have lost in your gold trading account before you start making profitable gold trades. For example if you have $10,000 xauusd capital and make 5 consecutive losing xauusd trades with a total of $1,500 loss before making 10 winning gold trades with a total of $4,000 profit. Then the xauusd trading maximum draw-down is $1,500 divided by $10,000, which is 15% maximum draw down.
DrawDown is $442.82 (4.40%)
Maximum DrawDown is $1,499.39 (13.56%)
To learn how to generate the above reports using MetaTrader 4 xauusd platform: Generate XAUUSD Reports on MT4 Tutorial - Trading with Tools of Gold Risk Management - XAUUSD Risk Management Calculator
Gold Risk Management Strategy
The example shown below shows the difference between risking a small percentage of your xauusd trading capital compared to risking a higher percentage. Good XAUUSD Risk Management Strategy principles requires you as an investor not to risk more than 2% of your total xauusd account equity on any one single gold trade transaction.
XAUUSD Percentage Risk Method
2% & 10% XAUUSD Trading Money Management Rule - XAUUSD Risk Management Strategy
There is a big difference between risking 2% of your xauusd account equity compared to risking 10% of your equity on a single xauusd trading trade transaction.
If you happened to go through a losing streak & lost only 20 gold trades in a row, you would have gone from starting xauusd account balance of $50,000 to having only $6,750 left in your xauusd account if you risked 10 % on each xauusd trade transaction. You would have lost over 87.50% of your xauusd account equity.
However, if you risked only 2% you would have still had $34,055 in your xauusd account which is only a 32% loss of your total xauusd account equity. This is why it is best to use 2% risk management strategy in xauusd.
Difference between risking 2 % and 10 % on a single xauusd trade transaction is that if you risked 2% you would still have $34,055 in your xauusd account after 20 losing trades.
However, if you risked 10% you would only have $32,805 in your xauusd account after only 5 losing trade transactions that is less than what you would have in your xauusd account if you risked only 2 % of your xauusd account & lost all 20 xauusd trade transactions.
The point is that you want to setup your XAUUSD Risk Management Strategy rules so that when you do have a loss making period, you will still have enough xauusd capital to trade next time.
If you lost 87.50% of your xauusd capital you would have to make 640% profit to get back to breakeven.
As compared to if you lost 32 % of your xauusd capital you would have to make 47% profit to get back to breakeven. To compare it with the xauusd trading example 47 % is much easier to break-even than 640% is.
The chart below shows what percentage you would have to make so that as a trader you can get back to breakeven if you were to lose a certain percentage of your gold trading capital.
Concept of Break Even - Trading with Tools of XAUUSD Trading Risk Management
XAUUSD Trading Account Equity & Break Even - Trading with Tools of XAUUSD Trading Risk Management
At 50% gold drawdown, one would have to earn 100 % on their invested xauusd capital - a feat accomplished by less than 5% of all xauusd traders worldwide - just to breakeven on a xauusd account with a 50% loss.
At 80% xauusd draw down, one must quadruple their xauusd trading equity just to bring it back to its original equity. This is what is called to "breakeven" - which means - get back to your original xauusd account balance that you deposited.
The more money you lose, the harder it's to make it back to your original xauusd account size.
This is why as a trader you should do everything you can to PROTECT your xauusd account equity. Do not accept to lose more than 2% of your xauusd account equity on any 1 single gold trade transaction.
XAUUSD Money Management is about only risking a small percent of your xauusd capital in each trade transaction so that you can survive your losing streaks and avoid a big draw down on your gold trading account.
In xauusd trading, traders use stop loss orders that are put in order to minimize xauusd trading losses. Controlling risks in xauusd involves putting a stoploss order after placing an new gold trade order.
Effective XAUUSD Trading Risk Management
Effective xauusd risk management requires controlling all the risks in trading & a trader should create a money management gold system & a money management xauusd trading plan. To be in xauusd or any other business you must make decisions involving some risk. All xauusd factors should be analyzed to keep risk to a minimum & use above xauusd money management tips on this article - Trading with Tools of XAUUSD Trading Risk Management.
Ask yourself? Some Tips
1. Can the risks to your xauusd trading investing activities be identified, what forms do they take? and are these clearly understood and planned for? All the xauusd trading risks should be taken care of in your xauusd plan.
2. Do you grade the trading risks encountered by you when xauusd in a structured way? - Do you have a xauusd plan? have you read about this learn xauusd topic which is thoroughly covered discussed here on this learn xauusd website.
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 market information & based on xauusd strategy or not? Have you read about xauusd systems here on this learn xauusd website guide lessons.
5. Are the xauusd trading risks large in relation to the turnover of your invested xauusd capital & what impact could they have on your xauusd trading profits margins & your xauusd account margin requirements?
6. Over what trading time periods do the trading risks of your xauusd activities exist? - Do you hold xauusd trades long term or short term? what type of xauusd trader are you?
7. Are the exposures in trading a one-off or they are recurring?
8. Do you know enough about the ways in which your xauusd risks can be reduced or hedged & what it would cost in terms of profit if you didn't include these measures to reduce potential loss, & what impact it would make to any upside of your xauusd trading profit?
9. Have your xauusd trading money management rules been adequately formulated, to ensure that you make and keep your xauusd profits.
