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