Draw Down & Maximum Draw Down - Forex Risk Management in Guide
Forex Draw Down & Risk Management in Market - Proper Forex Risk Management Tutorial
In any business, so as to make a profit a trader must learn how to manage the risks. To earn profits in forex you as a trader need to learn about the different risk management strategies discussed on this best learn forex tutorial web-site.
In online trading, risks to be managed are potential losses. Using forex risk management rules won't only protect your trade account but also make you profitable in the long run.
What's DrawDown? - Forex Risk Management Strategies in Trading
As traders the number one risk in forex is referred to as draw-down - this is the amount of money you've lost in your account on one trade.
If you have $10,000 trade capital & you make a loss in a single trade of $500, then your forex drawdown is $500 divided by $10,000 which is 5 % forex draw down.
Maximum Draw-Down - What is Maximum DrawDown?
This is the total amount of money you have lost in your account before you start making profitable trades. For example, if you have $10,000 trade capital & make five consecutive losing trade transactions with a total of $1,500 loss before making 10 winning trade transactions with a total of $4,000 dollars profit. Then the forex draw-down is $1,500 divided by $10,000, which is 15 % maximum trading draw down.
Forex DrawDown is $442.82 (4.40%)
Maximum Draw-Down is $1,499.39 (13.56 percent)
To know how to generate above forex trading reports using MT4 platform: Generate Forex Reports in MT4 Guide - Forex Risk Management in PDF - Rules of Risk Management in Forex Trading
Forex Money Management - Draw Down & Risk Management in Market
The example below shows the difference between risking a small percent of your forex capital compared to risking a higher %. Good Forex Draw Down & Risk Management in Market principles requires you as a trader not to risk more than 2 % of your total account equity on any one single trade.
FX Percentage Risk Method
2 percent & 10 percent Risk Management Rule - Draw Down & Risk Management in Market
There is a big difference between risking 2 percent of your account equity compared to risking 10% of your equity on one trade.
If you happened to go through a losing fx streak and lost only 20 trades in a row, you would have gone from beginning account equity balance of $50,000 dollars to having only $6,750 dollars left in your trading account if you risked 10 % on each trade. You would have lost over 87.5 % of your account equity.
However, if you only risked 2 % you would have still had $34,055 in your trading account which is only a 32 percent loss of your total account equity. This is why it is best to use the 2 % forex risk management strategy in forex.
Difference between risking 2 % & 10 % on one trade is that if you risked 2 % you would still have $34,055 in your account after 20 losing trades.
However, if you risked 10% you'd only have $32,805 dollars in your trading account after only five losing trade transactions that's less than what you would have in your account if you risked only 2 % of your trading account and lost all 20 FX trades.
The point is that you want to setup your Forex Draw Down & Risk Management in Market rules so that when you do have a loss making period, you'll still have enough trading capital to trade next time.
If you lost 87.5 % of your trade capital you'd have to make 640 % profit to get back to break-even.
As compared to if you lost 32 % of your trade capital you would have to make 47% profit to get back to the break-even. To compare it with the example 47 % is much easier to break even than 640% is.
The chart below shows what percent you'd have to make so that you as a trader can get back to break-even if you were to lose a certain percent of your forex capital.
Concept of BreakEven - Forex Risk Management in Tutorial
Account Equity and Break Even - Forex Risk Management Strategies for Serious Traders
At 50% forex draw down, one would have to make 100% on their invested trade capital - a task accomplished by less than 5 % of all traders worldwide - just to breakeven on a account with a 50% loss.
At 80% fx draw down, one must quadruple their forex equity just to take it back to the original equity. This is what's known as to "break even" - which means - get back to your original equity balance which you as a trader started with.
The more equity you lose, harder it is to make it back to your original account size.
This is why as a trader you should do everything you can to PROTECT your account equity. Do not accept to lose more than 2 % of your trading account equity on any one single trade.
Forex Money management is about only risking a small percentage of your trade capital in each trade so that you can survive your losing streaks and avoid a big draw-down on your account.
In FX trading, traders use forex stop loss orders which are put in order to minimize forex losses. Controlling risks in fx involves putting a stop loss order after placing an new order.
Effective FX Risk Management
Effective forex equity management requires mitigating all the risks in forex & a trader should come up with a risk management system and a risk management trading plan. To be in forex or in any other business you must make decisions that-involve some risk. All trading factors should be analyzed to keep risk to a minimum & use above forex risk management tips on this learn forex lesson - Forex Risk Management in Tutorial.
Ask yourself? Some FX Tips
1. Can the forex risks to your forex activities be identified, what forms do they take? and are these clearly understood and planned for in your forex trading plan? All the forex risks should be taken care of in your forex plan.
2. Do you grade the risks encountered by you when fx trading in a structured way? - Do you have a risk management strategy & a trading plan? have you as a trader read about this learning forex tutorial which is well covered discussed here on this learn forex site for beginners.
3. Do you know the maximum potential risk of each exposure for each trade which you place?
4. Are trading decisions made on basis of reliable and timely market information and based on forex strategy or not? Have you read about systems on this learning forex website.
5. Are the forex risks large in relation to the trade turnover of your invested trade capital & what impact could they have on your forex profits margins and your account margin requirements?
6. Over what time periods do the forex risks of your forex activities exist? - Do you as a trader hold trades long-term or short-term? what type of trader are you?
7. Are the exposures in trading a one-off or are they recurring?
8. Do you know enough about strategies in which your forex risks can be reduced or hedged and what it would cost in terms of profit if you didn't include these stipulated measures to reduce potential loss, & what impact it would make to any upside of your forex profit?
9. Have your forex risk management rules been adequately addressed, to ensure that you make & keep your forex profits.
Forex Equity Management Strategies for Serious Traders in Trading - Forex Risk Management in PDF - Rules of Risk Management in Forex Trading
