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