Draw Down and Maximum Draw Down in Crude Oil Trading

How to Calculate Risk Management Oil Trading

In any business, in order to make a oil profit a trader must learn how to manage the risks. To make oil profits in trading oil you need to learn about the various oil trading money management strategies discussed on this learn trading oil guide website.

When it comes to oil trading, the risks to be managed are potential oil losses. Using oil risk management rules won't only protect your oil account but also make you profitable in long run.

What is DrawDown in Crude Oil Trading?

As oil traders the number one risk in trading oil trading is referred to as draw down - this is the amount of money you've lost in your crude oil trading account on a single oil trade transaction.

If you have $10,000 oil capital & you make a oil loss in a single oil trade of $500, then your oil drawdown is $500 divided by $10,000 which is 5% oil draw down.

What is Maximum Oil Trading Draw Down?

This is the total amount of money you've lost in your oil trade account before you start making profitable crude oil trades. For examples if you have $10,000 in trading oil capital & make 5 consecutive losing oil trade positions with a total of $1,500 oil loss before making 10 winning crude oil trades with a total of $4,000 oil profit. Then the oil draw down is $1,500 divided by $10,000, which is 15% maximum oil draw down.

Oil Trading Draw Down is $442.82 (4.40%)

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

To learn how to generate the above in trading oil trading reports using MT4 oil platform: Generate Oil Trading Reports in MetaTrader 4 Guide - Oil Money Management System Tutorial - Oil Trading Risk Management Excel Spreadsheet

How to Calculate Risk Management Crude Oil Trading

The in trading oil example explained below shows the difference between risking a small percent of your oil trading capital compared to risking a higher percent. Good How to Calculate Risk Management Oil Trading principles requires you as a trader not to risk more than 2% of your total oil trading account equity on any one single oil trade transaction.

Oil Percentage Risk Technique

2% & 10% Oil Money Management Rule - How to Calculate Risk Management Crude Oil Trading - Importance of Risk Management in Trading Oil

There is a big difference between risking 2% of your oil account equity compared to risking 10% of your equity on a single oil trade transaction.

If you happened to go through a losing oil streak & lost only 20 crude oil trades in a row, you would have gone from starting oil trading account balance of $50,000 to having only $6,750 left in your crude oil trading account if you risked 10 % on each oil trade. You would have lost over 87.50% of your oil trading account equity.

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

Difference between risking 2% & 10% on a single oil trade is that if you risked 2% you would still have $34,055 in your oil account after 20 losing trades.

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

The point is you want to setup your How to Calculate Risk Management Oil Trading rules so that when you do have a oil loss making period, you will still have enough in trading oil capital to trade next time.

If you lost 87.50% of your in trading oil capital you would have to make 640% oil profit to get back to breakeven.

As compared to if you lost 32 % of your in trading oil capital you would have to make 47% oil profit to get back to the break-even. To compare it with the oil examples 47% is much easier to breakeven than 640 % is.

The chart below shows what percentage you would have to make in order to get back to break even if you were to lose a certain percentage of your in trading oil trading capital.

Concept of Break Even - Oil Money Management System PDF

Crude Oil Account Equity & Break Even - Oil Money Management Methods - Oil Money Management System PDF

At 50% oil draw down, one would have to earn 100% on their invested oil capital - a feat accomplished by less than 5% of all oil traders worldwide - just to breakeven on a oil trading account with a 50% oil loss.

At 80% oil draw down, one must quadruple their oil trading equity just to bring it back to its original equity. This is what is known as to "breakeven" - which means - get back to your original oil trading balance that you started with.

The more money you lose, the harder it's to make it back to your original oil trading account size.

This is why as a trader you should do everything you can to PROTECT your oil trading account equity. Do not accept to lose more than 2% of your oil trading account equity on any 1 single oil trade transaction.

Oil Trading Money Management is about only risking a small percent of your oil capital in each oil trade so that you can survive your losing streaks & avoid a big draw down on your crude oil trading account.

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

Effective Oil Trading Risk Management

Effective in trading oil risk management requires controlling all the risks in trading oil and a trader should create a money management oil system & a money management in trading oil plan. To be in trading oil or any other business you must make decisions involving some risk. All in trading oil factors should be interpreted to keep risk to a minimum & use the above oil money management tips on this article - Oil Trading Money Management System Tutorial.

Ask yourself? Some Oil Trading Tips

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

2. Do you grade the trading risks encountered by you when in trading oil in a structured way? - Do you have a money management oil strategy & a in trading oil plan? have you read about this learn in trading oil topic which is well covered explained here on this learn oil trading site for beginner traders.

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

4. Are trading decisions made on the basis of reliable and timely oil market data & based on a in trading oil strategy or not? Have you read about in oil systems on this learn oil web site.

5. Are the oil risks large in relation to the trade turnover of your invested oil capital and what impact could they have on your oil profits margins & your oil account margin requirements?

6. Over what time periods do the in trading oil risks of your in trading oil activities exist? - Do you hold in trading oil trade positions longterm or shortterm? what type of oil trader are you?

7. Are the exposures in trading a one off or they are recurring?

8. Do you know about the techniques in which trading oil risks can be reduced or hedged and what it would cost in terms of oil profit if you didn't include these measures to reduce potential oil loss, & what impact would it make to any up side of your oil profit?

9. Have your oil money management guide-lines been adequately addressed, to ensure that you make & keep your in trading oil profits.

Trading Oil Risk Management and Oil Money Management Methods - Draw Down Oil Trading Risk Management Chart - Draw Down Oil Risk Management Calculation