What are Major Types of Risks?
Gold Risk Management Strategy
In any biz, so as to make profit one must learn how to manage risks. To make profits in trade you need to learn about the different gold risk management techniques discussed on this learn gold lesson site.
In online gold trading, the risk to be managed are potential losses. Using risk management rules will not only protect your trading account but also make you profitable in long run.
What's Draw-Down in XAUUSD Trading?
As traders the number one risk in trade is referred to as draw down - this is the sum of money you have lost in your xauusd trading account on one trade transaction.
If you have $10,000 dollars capital and you make a loss in a single trade transaction of $500, then your gold trading draw-down is $500 divided by $10,000 which is 5% draw down.
What is Maximum Draw-Down?
This is the total sum of money you have lost in your xauusd trading account before you begin making profitable xauusd trades. For example, if you have $10,000 gold trading capital and make 5 consecutive losing trades with a total of $1,500 dollars loss before making 10 winning trades with a total of $4,000 dollars profit. Then the draw-down is $1,500 dollars divided by $10,000, which is 15 % maximum draw down.
DrawDown is $442.82 (4.4%)
Max Draw-Down is $1,499.39 (13.56 %)
To learn how to generate above reports using MT4 trading software: Generate Gold Reports on MT4 Guide - Trading with Tools of Money Management - Money Management Calculator
XAUUSD Money Management Strategy
The example shown and described below displays the difference between risking a small percentage of your gold capital compared to risking a higher percent. Good Gold Money Management Strategy principles requires you as an investor not to risk more than 2% of your total account equity on any 1 single trade transaction.
Gold Percentage Risk Method
2 % and 10% Money Management Rule - Risk Management Strategy Method
There's a big difference between risking 2 percent of your trading account equity compared to risking 10% of your equity on a single trade transaction.
If you happened to go through a losing streak and lost only 20 trades in a row, you would have gone from starting equity balance of $50,000 dollars to only having $6,750 dollars left in your trading account if you risked 10% on each transaction. You would have lost over 87.50% of your account equity.
However, if you only risked 2 percent you would have still had $34,055 in your trading account which is only a 32 % loss of your total account equity. This is why it is best to use 2% risk management strategy in xauusd.
The difference between risking 2 % and 10 % on one trade transaction is that if you risked 2% you would still have $34,055 in your account after 20 losing trade transactions.
However, if you risked 10% you'd have only $32,805 dollars in your account after only five losing trade transactions that is less than what you would have in your account if you risked only 2% of your trading account and lost all 20 trades.
The point is that you want to set up your Gold Money Management Strategy rules so that when you do have a loss making period, you will still have enough gold trading equity to trade next time.
If you lost 87.5% of your gold trading capital you'd have to make 640 % profit to get back to break even.
As compared to if you lost 32 % of your capital you would have to make 47% profit to go back to break even. To compare it with the example 47 % is much easier to break-even than 640% is.
The trading 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 capital.
Concept of BreakEven - Trading with Tools of Risk Management
Account Equity & Break Even - Trading with Tools of Risk Management
At 50% draw-down, a trader would have to earn 100 % on their invested gold trading capital - a feat accomplished by less than 5% of all traders worldwide - just to breakeven on a account with a 50% loss.
At 80% draw down, a trader must quadruple their trade equity just to bring it back to its original equity. This is what is called to "breakeven" - which means - get back to your original account balance that you deposited.
The more equity you as a trader lose, the harder it's to make it back to your original account size.
This is why as a trader you should do everything you can to PROTECT your account equity. Do not accept to lose more than 2% of your trading account equity on any 1 single trade.
Gold Money management is about only risking a small percentage of your gold capital in each trade transaction so that you can survive your losing streaks and avoid a big drawdown on your account.
In gold trading, traders use stop losses that are put in order to minimize gold losses. Controlling risks in gold trading involves setting a stop loss order after placing an new trading order.
Effective Gold Risk Management
Effective trade risk management requires controlling all risks in trading & a trader should create a money management gold system & a money management gold plan. To be in trade or in any other business you must make decisions that-involve some risk. All gold trading factors should be interpreted to keep risk to a minimum & use the above gold money management tips on this article - Trading with Tools of Risk Management.
Ask yourself? Some Tips
1. Can the risks to your gold investing activities be identified, what forms do they take? & are these clearly understood and planned for? All the risks should be taken care of in your gold trading plan.
2. Do you grade the risks encountered by you when xauusd trading in a structured way? - Do you have a trade plan? have you as a trader read about this learning gold trading topic which is thoroughly covered discussed here on this learn gold web site.
3. Do you know maximum potential risk of each exposure for each trade which you place?
4. Are trading decisions made on the basis of reliable & timely market information and based on trading strategy or not? Have you read about systems here on this learn gold website tutorial lessons.
5. Are the risks large in relation to the turnover of your invested gold capital and what impact could they have on your gold profits margins & your trading account margin requirements?
6. Over what time periods do the trade risks of your trade activities exist? - Do you hold trade transactions long-term or short-term? what type of trader are you?
7. Are the exposures in trading one-off or they--areare--they recurring?
8. Do you know enough about methods in which your gold trading risks can be reduced or hedged & what it would cost in terms of profits if you didn't include these measures to reduce the potential loss, and what impact would it make to any upside of your gold profit?
9. Have your gold money management guidelines been adequately formulated, to ensure that you make & keep your gold trading profits.
