Draw Down and Maximum Draw Down - What are Major Types of Risks? - Trading with Tools of Risk Management

Forex Risk Management Strategy - The Ultimate Money Management Tutorial PDF

In any business, so as to make a profit a trader must learn how to manage the risks. To earn profits in forex trade you need to learn about the different 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 trading account but also make you profitable in long run.

Draw-Down - What is DrawDown? - What are Major Types of Risks?

As traders the number 1 risk in forex trading is referred to as draw-down - this is the sum of money you have lost in your trading account on one trade.

If you have $10,000 capital & you make a loss in a single forex trade transaction of $500, then your 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 Risks?

This is the total sum of equity you have lost in your trading account before you begin making profitable trades. For example, if you have $10,000 forex capital and make five consecutive losing forex trade positions with a total of $1,500 trade loss before making 10 winning forex trade transactions with a total of $4,000 profit. Then the forex draw-down is $1,500 divided by $10,000, which is 15 percent maximum draw down.

Draw-Down is $442.82 (4.4%)

Maximum Draw Down is $1,499.39 (13.56%)

To learn how to generate above reports using MetaTrader 4 trading platform: Generate FX Reports in MT4 Tutorial - Trading with Tools of Risk Management - Money Management Calculator

Forex Equity Management - Money Management Tutorial PDF

The example below shows the difference between risking a small percentage of your capital compared to risking a higher %. Good Forex Money Management Strategy principles requires you as an investor not to risk more than 2% of your total account equity on any one single forex trade.

Forex Percent Risk Method

2% & 10% Equity Management Rule - Money Management Strategy Tutorial

There is a large difference between risking two percentage of your account equity compared to risking 10 percent of your equity on a single trade.

If you happened to go through a losing streak & lost only 20 trades in a row, you'd have gone from beginning forex account equity balance of $50,000 to only having $6,750 left in your account if you as a trader risked 10% on every forex trade. You would have lost over 87.5% of your account equity.

However, if you only risked 2% you'd have still had $34,055 in your trading account which is only a 32% loss of your total account equity. This is why it is best to use 2 % risk management strategy in forex trading.

Difference between risking 2% and 10% on one forex trade transaction is that if you risked 2% you would still have $34,055 in your account after 20 losing trade transactions.

However, if you as a trader risked 10% you would have only $32,805 in your account after only 5 losing trade transactions that is less than what you would have in your account if you risked only 2% of your trading account and lost all 20 trade transactions.

The point is that you as a trader want to setup your Money Management Strategy rules so that when you do have a loss making period, you will still have enough forex funds to open a trade transaction next time.

If you lost 87.5 percent of your capital you would have to make 640 % profit to go back to break even.

As compared to when if you lost 32% of your trading capital you'd 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 trading capital.

Concept of Break Even - Trading with Tools of Risk Management

Account Equity and Break Even - Trading with Tools of Risk Management

At 50% forex draw down, a trader would have to make 100% on their forex capital - a feat accomplished by less than 5 percent of all traders worldwide - just to breakeven on a account with a 50% loss.

At 80% draw down, one must quadruple their trade equity just to take it back to the original equity. This is what is called to "break even" - which means - get back to your original account balance that you deposited.

The more funds 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 fx trade.

Forex Money management is about only risking a small percentage of your capital in each trade transaction so that you can survive your losing streaks and avoid a big draw-down on your account.

In Forex trading, traders use forex stop loss orders which are put in order to minimize forex losses. Controlling risks in forex involves putting a stop loss order after placing an new forex order.

Effective FX Risk Management

Effective forex trade equity management requires mitigating all the risks in trading and one should come up with a money management forex system & a equity management forex plan. To be in forex trade or in any other biz you must make decisions that-involve some risk. All trading factors should be analyzed to keep risk to a minimum & use above forex equity management tips on this article - Trading with Tools of Risk Management.

Ask yourself? Some Tips

1. Can the risks to your investing activities be identified, what forms do they take? and are these clearly understood & planned for? All the forex risks should be taken care of in your trading plan.

2. Do you grade the risks encountered by you when forex trading in a structured way? - Do you have a trade plan? have you read about this learning forex 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 and timely market information & based on forex 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 & what impact could they have on your profits margins and your trading account margin requirements?

6. Over what time periods do the trade risks of your trade activities exist? - Do you hold forex trade transactions 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 methods in which your 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 profit?

9. Have your money management rules been adequately formulated, to ensure that you make & keep your profits.