DrawDown and Maximum Draw Down

Commodity Trading Risk Management Strategy

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 money management strategies discussed on this learn commodity tutorial web site.

When it comes to online commodity, 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 referred to as draw down - this is the amount of money you've lost in your commodity account on a single commodity trade transaction.

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

Maximum Draw Down

This is the total amount of money you've lost in your commodity account before you begin making profitable commodities trades. For examples 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 trading maximum draw down is $1,500 divided by $10,000, which is 15% maximum draw down.

DrawDown is $442.82 (4.4%)

Maximum Draw Down is $1,499.39 (13.56 %)

To learn how to generate the above reports using MT4 commodity platform: Generate Commodities Reports on MT4 Guide - Trading With Tools of Commodities Risk Management - Commodity Trading Risk Management Calculation

Commodity Trading Money Management

The example illustrated and explained below shows the difference between risking a small percentage of your commodity trading capital compared to risking a higher percentage. Good Commodity Trading Risk Management Strategy principles requires you as an investor 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% Commodity Money Management Rule - Commodity Risk Management Strategy

There is a big difference between risking 2% of your commodity account equity compared to risking 10% of your equity on a single commodity trade transaction.

If you happened to go through a losing 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 transaction. 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 % loss of your total commodity account equity. This is why it's best to use the 2% risk management strategy in commodity.

Difference between risking 2% & 10% on a single commodity trade transaction 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 trade transactions that is 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 Risk Management Strategy 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 87.5% 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 breakeven. 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 so as to get back to break even if you were to lose a certain percentage of your commodity capital.

Concept of Break Even - Trading With Tools of Commodity Trading Risk Management

Commodity Account Equity & Break Even - What are the Major Types of Commodity Trading Risks? - Trading With Tools of Commodity Trading Risk Management

At 50% commodities 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 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 called to "breakeven" - which means - get back to your original commodity account balance that you deposited.

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 transaction so that you can survive your losing streaks and avoid a big 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 trade order.

Effective Commodities Trading Risk Management

Effective commodity risk management requires controlling all risks in trading and a trader should create a money management commodities trading system & a money management commodity trading 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 tutorial - Trading With Tools of Commodity Trading Risk Management.

Ask yourself? Some Tips

1. Can the risks to your commodity trading investing activities be identified, what forms do they take? and are these clearly understood and planned for? 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 commodity plan? have you read about this learn commodity topic which is thoroughly covered discussed here on this learn commodity web site.

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 market information and based on commodity strategy or not? Have you read about commodity systems here on this learn commodity trading web site tutorial courses.

5. Are the commodity trading risks large in relation to the 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 trading 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 the ways 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 money management guidelines been adequately formulated, to ensure that you make and keep your commodity profits.