Trade Forex Trading

Draw Down & Maximum Draw Down in FX Trading

When in business and also in trading, so as for one to earn a profit one must learn to manage risks. In trading online, a trader must learn & understand how to manage risks. A trader should learn and know what the trading risks are. Once a trader knows what the risks(drawdown) are in trading then they can come up with the necessary tools that will mitigate these trading risks. To make profits on trading you need to learn about various money management strategies discussed on this best learn tutorial web site.

In trading, risks to be managed are potential trading losses. Using money management rules will not only protect your trading account but also serve to make you profitable in the long run.

Draw Down

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

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

Maximum Draw Down

This is the total sum of money you have lost on your account before you start earning and making profitable trade positions. For example, if you have $10,000 capital and make five consecutive losing trade transactions with a sum total of $1,500 loss before making 10 winning trade transactions with a sum total of $4,000 profit. Then the draw down is $1,500 divided by $10,000, which's 15 % maximum draw-down.

Draw Down vs Maximum Draw Down

Draw Down is $442.82 (4.4%)

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

To know how to generate the above reports using MT4 platform: Generate Reports on MT4 Guide Lesson

Money Management in FX Trading

The exemplification laid-out below shows difference between risking a small % of your capital in comparison to risking a higher Percent. Good investment principles requires you as a not to risk more than 2 percent of your total equity.

Percentage Risk Method

2% & 10Percent Risk Per Strategy in Money Management - Forex Trade Money Management Strategy

2 percent and 10 percent Risk Rule

There's a large/big difference between risking 2 % of your equity compared and analyzed to risking 10% of your equity on a single transaction.

If you happened to go through a losing streak and lost only 20 trade transactions on a row, you would have gone from beginning balance of $50,000 dollars to having only $6,750 left if you risked 10% on each trade transaction. You would have lost over 87.50 % of your equity.

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

The 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 after only 5 losing trade positions that's less than what you'd have if you risked only 2 % of your account & lost all 20 trade positions.

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

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

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

Chart below shows what percentage you'd have to make to get back to break even if you were to lose a certain % of your trade capital.

Concept of Break Even

Forex Money Management

Account Equity and Break-Even

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

At 80% draw down, a trader must quadruple their equity just to bring it back to its initial equity. This is what is called to "break-even" i.e. Go back to your original trading account balance that you deposited.

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

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

Money management is about only risking a small percent of your trade capital in each trade transaction so that you as a trader can survive your losing streaks & avoid a large/big draw down on your account.

In FX, traders use stoploss orders which are placed in order and so as to reduce losses. Controlling risks it involves placing a stoploss order after setting an order.

Effective Money Management

Effective risk management requires controlling all the trading market risks. A trader should create a clear risk management system & a plan. To be in Forex 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? and are they clearly understood and planned for? All the risks should planned for in your plan.

2. Do you grade risks faced by you as a trader when trading in a structured way? - Do you have a trading plan? - have you read about this course guide which is thoroughly covered here on this Website.

3. Do you as a trader know the maximum potential trading risk of each exposure for each trade transaction which you place?

4. Are decisions made on basis of reliable and timely data & based on a strategy or not? Have you read about systems here on this website tutorial lessons.

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 time periods do the trading risks of your trading activities exist? - Do you hold trades long term or short term? what type of trader are you?

7. Are exposures of your market trading activities a one-off or are they recurring?

8. Do you as a trader know enough about the methods in which your risks can be reduced and what it would cost if you did not include these estimates 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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