Draw Down vs Maximum Draw Down
Risk Management In Commodity Trading
In any business, in order to make a profit a trader must learn how to manage the risks. To make profits in commodity you need to learn about the various commodity trading money management strategies discussed on this learn commodity guide website.
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 account but also make you profitable in long run.
Draw Down
As commodity traders the number one risk in commodities trading is also referred to as draw down - this is the amount of money you've lost in your commodity account on a single commodities trade.
If you have $10,000 commodity 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 Commodities Trading Draw Down
This is the total amount of money you've lost in your commodity account before you start making profitable commodities trades. For example if you have $10,000 commodity 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 DrawDown is $442.82 (4.40%)
Maximum Commodity DrawDown 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 - Risk Management in Commodities Trading Market Books - Risk Management In Commodities Books
Commodity Trading Money Management
The commodity example illustrated & explained below shows the difference between risking a small percent of your commodity capital compared to risking a higher percent. Good Risk Management In 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.
Commodity Trading Percentage Risk Technique
2% & 10% Commodities Money Management Rule - Risk Management In Commodity Trading
There's a big difference between risking 2% of your commodity account equity compared to risking 10% of your equity on a single commodities trade.
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 87.50% 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 % loss of your total commodity account equity. This is why it is best to use the 2% risk management strategy in commodity.
The 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 is less than what you would have in your commodity account if you risked only 2 % of your commodity account & lost all 20 commodity transactions.
The point is you want to setup your Risk Management In Commodity Trading rules so that when you do have a loss making period, you'll still have enough commodity capital to trade next time.
If you lost 87.50% of your commodity capital you would have to make 640% profit to get back to breakeven.
As compared to if you lost 32% of your commodity 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 breakeven 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 capital.
Concept of Break Even - Risk Management In Commodity Trading Market Books
Commodity Account Equity & Break Even - Risk Management In Commodity Market Course - Risk Management In Commodity Trading Market Books
At 50% commodities trading drawdown, one would have to earn 100 % on their invested commodity capital - a feat accomplished by less than 5% of all commodity traders worldwide - just to breakeven on a commodity account with a 50% loss.
At 80% commodity draw down, one must quadruple their commodity equity just to bring it back to the 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's 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.
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 large draw down on your commodities trading 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 trading order.
Effective Commodities Trading Risk Management
Effective commodity risk management requires controlling all the risks in commodity and a trader should create a money management commodity system and a money 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 money management tips on this learn commodity trading lesson - Risk Management In Commodity Trading Market Books.
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 written commodity plan? All the commodity trading risks should be taken care of in your commodity plan - written commodity plan.
2. Do you grade the trading risks encountered by you when commodity in a structured way? - Do you have a money management strategy and a commodity plan? have you read about this learn commodity lesson which is well covered and discussed here on this learn commodity guide course for beginners.
3. Do you know maximum potential risk of each exposure for each trade that you place?
4. Are commodity decisions made on basis of reliable and timely commodity market data & based on a commodity strategy or not? Have you read about commodity systems on this learn commodity course.
5. Are the commodity trading risks big in relation to trade turnover of your invested commodity 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 trades 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, & what impact would it make to any upside of your commodity trading profit?
9. Have your commodity trading money management guidelines been adequately addressed, to ensure that you make & keep your commodity profits.
Risk Management In Commodity Trading Market Lesson - Risk Management in Commodities Trading Market Books - Risk Management In Commodities Books
