Draw Down and Maximum Draw Down - What are Major Types of Forex Risks? - Trading with Tools of Forex Risk Management
Forex Risk Management Strategy - The Ultimate Trading Risk Management Tutorial PDF
In any business, so as to make a profit a trader must learn how to manage the risks. To make profits in forex trading you need to learn about the various forex money management strategies discussed on this best learn forex tutorial web-site.
When it comes to online forex trading, the risks to be managed are potential losses. Using forex risk management rules won't only protect your forex account but also make you profitable in long run.
Draw Down - What is Draw Down? - What are Major Types of Forex Risks?
As forex traders the number one risk in forex trading is referred to as draw-down - this is the amount of money you have lost in your forex trading account on a single FX trade transaction.
If you have $10,000 forex capital and you make a loss in a single forex trade transaction of $500, then your forex trading drawdown is $500 divided by $10,000 which is 5% draw down.
Maximum Draw Down - What is Maximum Draw Down? - What are Major Types of Forex Risks?
This is the total amount of money you have lost in your forex trading account before you begin making profitable forex trades. For examples if you have $10,000 forex trading capital and make 5 consecutive losing forex trade positions with a total of $1,500 loss before making 10 winning forex trades with a total of $4,000 profit. Then the forex draw down is $1,500 divided by $10,000, which is 15% maximum draw down.
Draw-Down is $442.82 (4.4%)
Maximum Draw-Down is $1,499.39 (13.56%)
To learn how to generate the above reports using MetaTrader 4 forex trading platform: Generate Forex Trading Reports in MetaTrader 4 Guide - Trading with Tools of Forex Risk Management - Forex Trading Risk Management Calculator
Forex Money Management - Forex Trading Risk Management Tutorial PDF
The example below shows the difference between risking a small percentage of your forex capital compared to risking a higher percentage. Good Forex Trading Risk Management Strategy principles requires you as an investor not to risk more than 2% of your total forex account equity on any one single forex trade.
Forex Percentage Risk Method
2% & 10% Forex Money Management Rule - Forex Trading Risk Management Strategy Guide
There is a big difference between risking 2% of your forex account equity compared to risking 10% of your equity on a single FX trade transaction.
If you happened to go through a losing streak & lost only 20 forex trades in a row, you would have gone from starting forex account balance of $50,000 to having only $6,750 left in your forex account if you risked 10 % on each forex trade transaction. You would have lost over 87.50% of your forex trading account equity.
However, if you risked only 2% you would have still had $34,055 in your forex account which is only a 32% loss of your total forex account equity. This is why it is best to use 2% risk management strategy in forex trading.
Difference between risking 2 % and 10 % on a single forex trade transaction is that if you risked 2% you would still have $34,055 in your forex account after 20 losing trades.
However, if you risked 10% you would only have $32,805 in your forex account after only 5 losing trade transactions that is less than what you would have in your forex account if you risked only 2% of your forex account and lost all 20 FX trade transactions.
The point is that you want to setup your Forex Trading Risk Management Strategy rules so that when you do have a loss making period, you will still have enough forex trading capital to trade next time.
If you lost 87.5% of your forex trading capital you would have to make 640 % profit to get back to breakeven.
As compared to if you lost 32 % of your forex trading capital you would have to make 47% profit to get back to break even. To compare it with the forex example 47 % is much easier to break even than 640% is.
The chart below shows what percent you would 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 trading capital.
Concept of Break Even - Trading with Tools of Forex Risk Management
Forex Account Equity and Break Even - Trading with Tools of Forex Risk Management
At 50% forex trading draw down, one would have to earn 100 % on their invested forex trading capital - a feat accomplished by less than 5% of all forex traders worldwide - just to breakeven on a forex account with a 50% loss.
At 80% forex draw down, one must quadruple their forex trading equity just to bring it back to its original equity. This is what is called to "break even" - which means - get back to your original forex trading account balance that you deposited.
The more money you lose, harder it is to make it back to your original forex trading account size.
This is why as a trader you should do everything you can to PROTECT your forex account equity. Do not accept to lose more than 2% of your forex account equity on any 1 single forex trade.
Forex Money management is about only risking a small percentage of your forex capital in each trade transaction so that you can survive your losing streaks and avoid a big draw-down on your forex trading account.
In Forex trading, traders use forex stop loss orders which are put in order to minimize forex losses. Controlling risks in forex trading involves putting a forex stop loss order after placing an new forex order.
Effective Forex Risk Management
Effective forex trading risk management requires controlling all the risks in trading & a trader should come up with a money management forex system & a money management forex plan. To be in forex trading or any other business you must make decisions involving some risk. All forex trading factors should be analyzed to keep risk to a minimum and use above forex money management tips on this article - Trading with Tools of Forex Risk Management.
Ask yourself? Some Tips
1. Can the risks to your forex investing activities be identified, what forms do they take? and are these clearly understood and planned for? All the forex risks should be taken care of in your forex trading plan.
2. Do you grade the trading risks encountered by you when forex trading in a structured way? - Do you have a forex trading plan? have you read about this learn forex trading topic which is thoroughly covered discussed here on this learn forex web site.
3. Do you know the maximum potential risk of each exposure for each trade that you place?
4. Are trading decisions made on basis of reliable & timely market information & based on forex trading strategy or not? Have you read about forex trading systems here on this learn forex website tutorial lessons.
5. Are the forex risks large in relation to the turnover of your invested forex capital and what impact could they have on your forex profits margins & your forex account margin requirements?
6. Over what time periods do the trading risks of your forex trading activities exist? - Do you hold forex trades long-term or short-term? what type of forex trader are you?
7. Are the exposures in trading a one-off or are they recurring?
8. Do you know enough about the ways in which your forex trading risks can be reduced or hedged & what it would cost in terms of profit if you didn't include these stipulated measures to reduce potential loss, and what impact it would make to any upside of your forex profit?
9. Have your forex money management rules been adequately formulated, to ensure that you make and keep your forex trading profits.
