Draw Down and Maximum Draw Down in Crude Oil Trading

Trading Oil Risk Management Strategies

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 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 crude oil trading account on a single oil trade.

If you have $10,000 oil trading capital and 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 have 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 trades 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 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 in trading oil trading reports using MetaTrader 4 oil platform: Generate Oil Trading Reports in MT4 Guide - DrawDown Oil Risk Management Chart - DrawDown Oil Risk Management Calculator

Trading Crude Oil Risk Management Strategies

The in trading oil example explained below shows the difference between risking a small percent of your oil capital compared to risking a higher percentage. Good Trading Oil Risk Management Strategies 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 - Trading Oil Risk Management Strategies - Oil Trade Management Strategies for Trading Oil

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 trading account & lost all 20 oil trade transactions.

The point is you want to setup your Trading Oil Risk Management Strategies rules so that when you do have a 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 % profit to get back to break-even.

As compared to if you lost 32% of your in 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 in trading oil trading capital.

Concept of Break Even - DrawDown Oil Risk Management Chart

Crude Oil Trading Account Equity and Break Even - Trading Oil Risk Management and Crude Oil Trading Money Management Strategies Methods - DrawDown Oil Risk Management Chart

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 account with a 50% 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 "break-even" - 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 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-loss orders that are put in order to minimize oil losses. Controlling risks in trading oil involves putting a oil stop loss oil trading order after placing an new oil trading order.

Effective Oil Trading Risk Management

Effective in trading oil risk management requires controlling all the risks in trading oil and a trader should come up with a money management oil system and 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 and use the above oil money management tips on this article - DrawDown Oil Trading Risk Management Chart.

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 trading oil 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 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 trading oil site for beginner traders.

3. Do you know the maximum potential 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 trading systems on this learn oil website.

5. Are the oil risks large in relation to the trade turnover of your invested 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 in trading oil risks of your in trading oil activities exist? - Do you hold in trading 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 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 trading money management guide-lines been adequately addressed, to ensure that you make & keep your in trading oil profits.

Trading Oil Risk Management and Oil Trading Money Management Strategies Methods - DrawDown Oil Risk Management Chart - DrawDown Oil Risk Management Calculator