Draw-down & Maximum DrawDown - Equity Management in Gold Trading

In a business so as to make profit one must learn how to manage the risks. To earn profits in Gold trading you as a trader need to learn about the different money management strategies discussed on this learn Gold trading website.

In XAU/USD trading, manage risks from losses. Equity rules protect your account. They help you earn profits over time.

Draw-down

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

If you have $50,000 capital and you accrue a loss in a single transaction of $500 dollars, then your draw down is $500 divided by $50,000 dollars which is 1 % draw down.

Maximum Draw-down

This is the overall total amount of money you've lost in your account before you begin & start making profitable trades. For example if you have $50,000 capital and make 5 consecutive losing trade positions with a total of $2,500 loss before making 10 winning trades with a total of $5,000 dollars profit. Then the draw down is $2,500 divided by $50,000 dollars, which is 5 % maximum draw-down.

Gold Trading Drawdown vs Gold Trading Maximum Drawdown Difference Explained - What is Draw Down in XAUUSD Trading?

Draw Down on the example revealed above is $442.82 (4.4%)

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

To learn how to generate the above trading reports using MT4 platform software: You can search on how to generate trading reports on MT4 Tutorials and Lessons.

Funds Management Techniques

The example below illustrates difference between risking a small percentage of your trading capital compared to risking a higher percentage of you trading capital. Good trading principles require you as an investor or a trader not to risk more than 2% of your total equity on any one single trade.

Percent Risk Method

Gold Trading Draw-down and Maximum Draw-down in Gold Trading

2% and 10% Risk Rule - Equity Management Rules

In trading, there's a big/large difference between risking 2% of your account equity compared to risking 10% of your account equity on one position.

If you happened to go through a losing streak when trading Gold and lost only 20 trades in a row, you would have gone from starting balance of $50,000 to having only $6,750 left in your account if you risked 10% on each position. You would have lost over 87.5% of your trading equity.

However, if you risked only 2 % when placing the trades, you'd still have had $34,055 dollars which is only a 32 % loss of your total trading equity.

This is why it is best to use the 2 % risk management strategy

The difference between risking 2% and 10% is that if you risked 2% per every trade you would still have $34,055 after 20 losing trades.However, if you risked 10% per trade you would only have $32,805 after only 5 losing trades & that's less than what you'd have had if you risked only 2 % of your account and lost all 20 trades.

The point is that you want to setup your equity money management rules so that as when you do have a loss making period, you'll still have enough trading capital to trade the next time.

If you lost 87.5% of your account capital you'd have to make 640 % profit on your remaining account balance just to get back to break-even.

As when compared and analyzed to if you lost 32% of your trading capital you'd have to make 47 % profit on your remaining account balance just to get back to break-even. To compare this with the above example, 47% maximum draw-down is much easier to break-even than 640% maximum draw down is.

The chart below shows what percentage of your trading equity you'd have to make so as to get back to break-even if you were to lose a certain percent of your trading capital.

Concept of BreakEven

Gold Trading Drawdown and Maximum Drawdown in Gold Trading - What is Draw Down in Gold Trading?

Account Equity and Concept of Break Even

At 50% draw down, a gold trader would have to earn 100% on their remaining trading capital - a feat that is accomplished by less than 5% of all traders globally - just to break-even on an account with a 50% loss.

At 80 % draw down, a gold trader must quadruple their account equity just to bring it back to its original equity level. This is what is referred to as "break-even" i.e. Get back to your original account balance that you deposited after making a draw down.

The more you lose, the harder it's to make it back to your original trading equity.

This is the reason why as a trader you should do everything you can to PROTECT your trading account equity. Don't accept to lose more than 2% of your equity on any 1 single trade.

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

In trading, traders use stop losses which are set in order to cap losses. Controlling risks involves putting a stop loss order after opening an order.

Effective Equity Management

Effective risk management strategy requires controlling all the trading risks. One should come up with a clear equity money management system and a plan. To be in XAU/USD trading business or in any other type of business you must make some decisions which involve some type of risk. All factors should be measured to keep risk to a minimum when trading Gold online and make sure you use the above tips on this guide.

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