Draw Down and Maximum Draw Down in Crude Oil Trading
Oil Trading Risk Management Strategy
In any business, in order to make profit one must learn how to manage risks. To make profits in oil trading you need to learn about the various oil money management strategies discussed on this learn oil lesson web-site.
When it comes to online oil trading, the risks to be managed are potential 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 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 loss in a single oil trade transaction of $500, then your oil trading draw down is $500 divided by $10,000 which is 5% draw down.
Maximum Draw Down
This is the total amount of money you've lost in your crude oil trading account before you begin making profitable crude oil trades. For example if you have $10,000 oil trading capital & make 5 consecutive losing oil trades with a total of $1,500 loss before making 10 winning crude oil trades with a total of $4,000 profit. Then the oil draw down is $1,500 divided by $10,000, which is 15% maximum draw down.
DrawDown is $442.82 (4.40%)
Maximum DrawDown is $1,499.39 (13.56%)
To learn how to generate the above reports using MT4 oil trading platform: Generate Oil Trading Reports in MetaTrader 4 Guide - Trading With Tools of Oil Risk Management - Oil Risk Management Calculation
Oil Trading Risk Management Strategy
The example explained below shows the difference between risking a small percentage of your oil capital compared to risking a higher percentage. Good Oil Trading Risk Management Strategy principles requires you as an investor 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% Crude Oil Money Management Rule - Oil Risk Management Strategy - The Oil Trading Risk Management Guide
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 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 transaction. You would have lost over 87.5% 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% loss of your total oil account equity. This is why it's best to use the 2% risk management strategy in crude oil trading.
Difference between risking 2% & 10% on a single oil trade transaction 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 trade transactions 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 Oil Trading Risk Management Strategy rules so that when you do have a loss making period, you'll still have enough oil capital to trade next time.
If you lost 87.50% of your oil capital you would have to make 640% profit to get back to breakeven.
As compared to if you lost 32% of your oil trading capital you would have to make 47% profit to get back to breakeven. 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 oil trading capital.
Concept of Break Even - Trading With Tools of Oil Trading Risk Management
Crude Oil Account Equity & Break Even - What are Major Types of Oil Trading Risks? - Trading With Tools of Oil Trading Risk Management
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% 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 called to "breakeven" - which means - get back to your original oil trading balance that you deposited.
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 trading capital in each oil trade transaction so that you can survive your losing streaks and avoid a big draw down on your crude oil trading account.
In oil trading, traders use oil stoploss orders which are put so as to minimize oil losses. Controlling risks in oil trading involves putting a oil stop loss oil trading order after placing an new oil trade order.
Effective Crude Oil Trading Risk Management
Effective oil trading risk management requires controlling all risks in trading and a trader should create a money management oil system and a money management oil plan. To be in oil trading or any other business you must make decisions involving some risk. All oil trading factors should be analyzed to keep risk to a minimum & use the above oil money management tips on this article - Trading With Tools of Oil Trading Risk Management.
Ask yourself? Some Tips
1. Can the risks to your oil investing activities be identified, what forms do they take? and are these clearly understood and planned for? All the oil risks should be taken care of in your oil trading plan.
2. Do you grade the trading risks encountered by you when oil trading in a structured way? - Do you have a oil trading plan? have you read about this learn oil trading topic which is thoroughly covered discussed here on this learn oil website.
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 market information and based on oil strategy or not? Have you read about oil trading systems here on this learn oil website tutorial lessons.
5. Are the oil risks large in relation to the turnover of your invested oil trading capital & what impact could they have on your oil profits margins & your oil account margin requirements?
6. Over what time periods do the trading risks of your oil trading activities exist? - Do you hold oil trading 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 enough about the ways in which your oil trading risks can be reduced or hedged and what it would cost in terms of profit if you did not include these specified measures to reduce potential loss, & what impact would it make to any up side of your oil profit?
9. Have your oil money management guidelines been adequately formulated, to ensure that you make and keep your oil trading profits.
