Draw Down and Maximum Draw Down in Gold Trading

In business in order to make a profit a trader must learn how to manage the risks. To make profits in trading you will need to learn about the various gold trading risk management methods discussed on this learn Gold lesson web site.

When it comes to trading, the risks to be managed are potential trading losses. Using gold trading money management guidelines will not only protect your account but also make you profitable in the long run.

Draw-down

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

If you have $10,000 capital and you make a loss in one trade of $500, then your drawdown is $500 divided by $10,000 which is 5 percent draw-down.

Maximum Draw-down

This is the total amount of money you have lost in your trading account before you start making profitable trades. For example if you have $10,000 capital and make five consecutive losing trades with a total of $1,500 trading loss before making 10 winning trades with a total of $4,000 profit. Then draw-down is $1,500 divided by $10,000, which is 15 % maximum draw-down.

DrawDown is $442.82 (4.4%)

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

To learn how to generate the above reports using MT4 platform: Generate Reports in MetaTrader 4 Guide

XAUUSD Trading Money Management

The examples illustrated and described below shows the contrast between risking a small percent of your capital compared to risking a higher %. Good investment principles requires you as a investor not to risk more than 2 percent of your total trading account equity.

Percent Risk Method

2 percent and 10 percent Risk Rule

There's a large difference between risking 2 percent of your equity compared to risking 10% of your equity on a single transaction.

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

However, if you only risked 2% you would have still had $34,055 which is only a 32 % loss of your total equity. This is why it is best to use the 2 percent risk management formula

The difference between risking 2% & 10 % is that if you risked 2% you'd still have $34,055 after 20 losing trades.

However, if you risked 10 % you'd only have $32,805 after only 5 losing trades that's less than what you would have if you risked only 2 % of your trading account and lost all 20 trades.

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

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

As compared to when if you lost 32 percent of your trading capital you'd have to make 47 % profit to get back to break-even. To compare it with the example 47 % is much easier to break even than 640% is.

The chart below shows what percentage you'd have to make to get back to break even if you were to lose a certain % of your capital.

Concept of Break Even

Account Equity & Break-Even

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

At 80% draw-down, one must quadruple their account equity just to take back to its original equity. This is what is called to "breakeven" i.e. Go back to your original account balance which you deposited.

The more you lose, the harder it's to make it back to your initial account size.

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

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

In Gold, traders use stoploss orders which are placed in order to reduce losses. Controlling risks it involves putting a stop order after placing an order.

Effective Risk Management in Gold Trading

Effective money management requires controlling all the trading risks. A trader should come up with a clear gold trading risk management system & a trading plan. To be in Gold or in any other business you must make decisions involving some risk. All aspects should be measured to keep risk to a minimum and use the above tips on this tutorial.

Ask yourself? Some Tips

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

2. Do you grade the risks faced by you when trading in a structured way? - Do you have a trading plan? - have you read about this course which is extensively covered discussed here on this Web Site.

3. Do you know the maximum potential risk of each exposure for each transaction that you place?

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

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

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

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

8. Do you know enough about the ways in which your Gold risks can be reduced or hedged and what it would cost if you did not include these measures to reduce potential loss, and what impact would it make to any upside of your profit?

9. Have your rules been adequately addressed, to ensure that you make and keep your profits.