Draw Down and Maximum Draw-down

In a business in order to make profit a trader must learn how to manage risks. To make profits in trading you need to learn about various silver trading money management strategies explained on this learn Silver tutorial website.

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

Draw-down

As traders the number one trading risk is known as draw-down - this is the sum of money you've lost in your account on one silver trading transaction.

If you have $10,000 capital & you make a loss in a single trade of $500, then your draw-down is $500 divided by $10,000 which is 5% draw-down.

Maximum Draw-down

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

Draw Down is $442.82 (4.4%)

Max 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

Trade Money Management

The example explained and displayed below shows the contrast between risking a small percentage of your capital compared to risking a higher percent. Good investment principles requires you as a not to risk more than 2% of your total account equity.

Percent Risk Technique

2 % and 10% Risk Rule

There is a big difference between risking two 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 would have gone from a beginning account balance of $50,000 to having only $6,750 left in your trading account if you risked 10% on each trade position. You would have lost over 87.50% of your equity.

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

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 would 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 will 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 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.

Chart below shows what percent you would have to make to get back to break even if you were to lose a certain percentage of your capital.

Concept of Break Even

Account Equity & Break Even

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

At 80% draw-down, a trader must quadruple their equity just to bring it back to its initial equity. This is what is called to "break-even" i.e. Get back to your original account balance which you deposited.

The more you lose, the harder it is to make it back to your original account size.

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

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

In Silver, traders use stop loss orders which are put in order to minimize losses. Controlling risks it involves putting a stop loss trading order after placing an order.

Effective Risk Management

Effective risk management requires controlling all risks. One should create a clear silver trading money management system and a plan. To be in Silver or any other business you must make decisions involving some risk. All factors should be measured to keep trading 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 Silver plan.

2. Do you grade the risks faced by you when trading in a structured way? - Do you've a trading plan? - have you read about this topic which is thoroughly 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 & based on a strategy or not? Have you read about trading systems here on this web site tutorial tutorials.

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

6. Over what time periods do risks of your trading activities exist? - Do you hold trade transactions long-term 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 Silver risks can be reduced or hedged and what it would cost if you did not include these measures to reduce potential loss, & what impact would it make to any up side of your profit?

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