Draw-Down vs Maximum Draw Down
How to Calculate Risk Management Commodity Trading
In any business, in order to make a commodity trading profit one must learn how to manage risks. To make commodity trading profits in commodity trading you need to learn about the various commodity money management strategies discussed on this learn commodity lesson web-site.
When it comes to commodity, the risks to be managed are potential commodity trading losses. Using commodity trading risk management rules will not only protect your commodity account but also make you profitable in long run.
Draw Down
As commodity traders the number one risk in commodity trading is referred to as draw down - this is the amount of money you've lost in your commodity account on a single commodities trade transaction.
If you have $10,000 commodity capital and you make a commodity trading loss in a single commodity trade of $500, then your commodity trading draw down is $500 divided by $10,000 which is 5% commodities trading draw down.
Maximum Commodities 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 in commodity capital & make 5 consecutive losing commodity trade positions with a total of $1,500 commodity trading loss before making 10 winning commodities trades with a total of $4,000 commodity trading profit. Then the commodity trading maximum draw down 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 in commodity trading reports using MT4 commodity trading platform: Generate Commodities Reports in MetaTrader 4 Guide - Commodities Trading Money Management System Tutorial - Commodity Trading Risk Management Excel Spreadsheet
Commodity Trading Money Management
The in commodities trading example illustrated & described below shows the difference between risking a small percent of your commodity capital compared to risking a higher percent. Good How to Calculate Risk Management Commodity Trading principles requires you as a trader not to risk more than 2% of your total commodity account equity on any one single commodities trade transaction.
Commodity Percentage Risk Technique
2% & 10% Commodities Trading Money 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 account equity.
However, if you risked only 2 % you would have still had $34,055 in your commodity account which is only a 32% commodity trading loss of your total commodity account equity. This is why it's best to use the 2% risk management strategy in trading 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 How to Calculate Risk Management Commodity Trading rules so that when you do have a commodity trading loss making period, you will still have enough in commodity trading capital to trade next time.
If you lost 87.5% of your in commodity trading capital you would have to make 640% commodity trading profit to get back to breakeven.
As compared to if you lost 32% of your in commodity trading capital you would have to make 47% commodity trading profit to get back to the break-even. To compare it with the 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 in order to get back to break even if you were to lose a certain percentage of your in commodity trading capital.
Concept of Break Even - Commodities Trading Money Management Strategy PDF
Commodity Account Equity & Break Even - Commodity Money Management Methods - Commodities Trading Money Management Strategy PDF
At 50% commodities drawdown, one would have to earn 100% on their invested commodity trading capital - a feat accomplished by less than 5% of all commodity traders worldwide - just to break-even on a commodity account with a 50% commodity trading 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 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 capital in each commodity trade so that you can survive your losing streaks & avoid a big draw down on your commodities trading account.
In trading commodity, traders use commodity trading stop commodity trading loss orders which are put in order to minimize commodity trading losses. Controlling risks in commodity trading involves putting a commodity stop commodity trading loss order after placing an new commodities trade order.
Effective Commodities Trading Risk Management
Effective in commodity trading risk management requires controlling all risks in commodities trading and a trader should create a money management commodities trading system & a money management in commodity trading plan. To be in commodity trading or any other business you must make decisions involving some risk. All in commodity trading factors should be interpreted to keep risk to a minimum and use the above commodity trading money management tips on this tutorial - Commodities Money Management System Tutorial.
Ask yourself? Some Commodities Tips
1. Can the commodity trading risks to your in commodity trading activities be identified, what forms do they take? and are these clearly understood & planned for in your in commodity plan? All the commodity trading risks should be taken care of in your in commodity trading plan.
2. Do you grade the trading risks encountered by you when in commodity trading in a structured way? - Do you have a money management commodity strategy & a in commodity trading plan? have you read about this learn in commodity trading tutorial which is well covered described here on this learn commodity website for beginner traders.
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 data & based on a in commodity trading strategy or not? Have you read about in trading commodity systems on this learn commodity website.
5. Are the commodity trading risks big in relation to the trade turnover of your invested commodity trading 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 in commodity trading risks of your in commodity trading activities exist? - Do you hold in commodity trading 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 commodity trading risks can be reduced or hedged and what it would cost in terms of commodity trading profit if you didn't include these measures to reduce potential commodity trading loss, and what impact would it make to any up side of your commodity trading profit?
9. Have your commodity money management guide-lines been adequately addressed, to ensure that you make and keep your in commodity trading profits.
Commodity Trading Risk Management & Commodities Money Management Methods - DrawDown Commodity Trading Risk Management Chart - DrawDown Commodity Trading Risk Management Calculation
