Draw Down and Maximum Draw Down in Crude Oil Trading

Risk And Money Management In Oil Trading

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

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

What is DrawDown in Crude Oil Trading?

As oil traders the number one risk in trading oil trading is also known as draw-down - this is the amount of money you have lost in your trading oil trading account on a single oil trade.

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

What is Maximum Oil Trading Draw Down?

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

Oil DrawDown is $442.82 (4.40%)

Maximum Oil DrawDown is $1,499.39 (13.56%)

To learn how to generate the above trading oil trading reports using MT4 oil platform: Generate Oil Trading Reports in MetaTrader 4 Guide - Oil Trading Risk Calculation - Position Size Oil Trading Risk Management - Money Management Oil Trading Excel Spread-sheet

Risk And Money Management In Crude Oil Trading

The trading oil example explained below shows the difference between risking a small percent of your trading oil capital compared to risking a higher percent. Good Risk And Money Management In 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.

Oil Percentage Risk Method

2% & 10% Oil Trading Money Management Rule - Risk And Money Management In Oil Trading - Trading Oil Risk Management Lessons

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

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 account balance of $50,000 to having only $6,750 left in your crude oil 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 trading account which is only a 32 % loss of your total oil trading account equity. This is why it is best to use the 2% risk management strategy in trading oil.

Difference between risking 2 % and 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 account if you risked only 2 % of your crude oil account and lost all 20 trading oil transactions.

The point is that you want to setup your Risk And Money Management In Oil Trading rules so that when you do have a loss making period, you'll still have enough trading oil capital to trade next time.

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

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

Concept of Break Even - Oil Trading Risk Calculation - Position Risk Management

Crude Oil Trading Account Equity and Break Even - Oil Trading Money Management System Tutorial Download - Oil Trading Risk Calculation - Position Risk Management

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

At 80% trading oil draw down, one must quadruple their trading crude oil equity just to bring it back to the 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 account equity on any 1 single oil trade.

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

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

Effective Oil Trading Risk Management

Effective trading oil risk management requires controlling all the risks in trading oil and a trader should come up with a money management trading oil system & a money management trading oil plan. To be in trading oil or any other business you must make decisions involving some risk. All trading oil factors should be interpreted to keep risk to a minimum and use the above oil money management tips on this learn oil lesson - Oil Trading Risk Calculation - Position Trading Risk Management.

Ask yourself? Some Oil Trading Tips

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

2. Do you grade trading risks encountered by you when trading oil in a structured way? - Do you've a money management strategy & a trading oil plan? have you read about this learn trading oil lesson which is well covered & discussed here on this learn trading oil guide course for beginners.

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

4. Are trading oil decisions made on the basis of reliable and timely oil market information and based on trading oil strategy or not? Have you read about trading oil systems on this learn trading oil course.

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

6. Over what time periods do the trading oil risks of your trading oil activities exist? - Do you hold oil trades 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 your trading oil risks can be reduced or hedged & what it would cost in terms of profit if you didn't include these measures to reduce potential 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 trading oil profits.

Oil Trading Money Management System Tutorial Download - Oil Trading Risk Calculation - Position Size Oil Trading Risk Management - Money Management Oil Trading Excel Spread-sheet