Trade Gold Trading

Draw Down & Maximum Draw Down in Gold Trading

In business in order to earn a profit a xauusd trader must learn how to manage the risks. To earn profits in trading you will need to learn about the various gold risk management methods discussed on this learn Gold lesson web site.

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

Draw-down

As traders the number one risk is known as draw down - this is the amount of money you have lost in your account on a single gold transaction.

If you have $10,000 capital & you accrue a loss in one trade of $500 dollars, then your draw down is $500 divided by $10,000 dollars which's 5 percentage% draw-down.

Maximum Draw-down

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

Relative Draw Down and Maximum Draw Down in XAUUSD

Draw-Down is $442.82 (4.4%)

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

To learn how to generate above reports using MetaTrader 4 platform: Generate Reports in MT4 Tutorial

XAUUSD Capital Management

The examples illustrated & described below shows the contrast between risking a small percentage% of your capital compared to risking a higher %. Good investment principles requires you as a investor not to risk more than 2 percent of your total equity.

Percentage Risk Method

2% and 10% Risk Per Trade Strategy in Money Management - Gold Trading Funds Management Tutorial

2 percent & 10 percentage% Risk Rule

There's a big difference between risking two percentage% 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'd have gone from beggining equity balance of $50,000 to only having $6,750 dollars left in your account if you risked 10% on every transaction. You would have lost over 87.50% of your equity.

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

The difference between risking 2% & 10 % is that if you risked 2% you would still have $34,055 after 20 losing trades.

However, if you risked 10% you'd only have $32,805 dollars after only 5 losing trades that is less than what you'd have if you risked only 2 % of your trading account & lost all 20 trades.

The point is you want to set-up your rules so that when you do have a loss making period, you will still have enough capital to trade the next time.

If you lost 87.50% of your capital you'd have to make 640 % profit to get back to break-even.

As compared to when if you lost 32 percentage of your capital you'd have to make 47 % profit to get back to break-even. To compare it with the example 47% is much easier to break even than 640 % is.

The chart below shows what percentage you'd have to make to get back to break even if you were to lose a certain % of your capital.

Concept of Break Even

Trading Account Equity and Break Even Strategy - XAUUSD Money Management Tutorial Explained

Account Equity & Break-Even

At 50% draw-down, a gold trader would have to make 100% on their invested capital - a task accomplished by less than 5 % of all traders worldwide - just to break-even on an account with a 50 % loss.

At 80 % draw down, one must quadruple their trading equity just to take back to its original equity. This is what is called to "breakeven" i.e. Go back to your original trading account balance which you deposited.

The more you lose, the harder it's to make it back to your initial trading account size.

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

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

In XAUUSD, traders use stop loss orders which are placed in order to cap losses. Controlling risks it involves putting a stop order after placing an order.

Effective Money Management in Gold Trading

Effective money management requires controlling all the risks. A trader should come up with a clear gold risk management system & a plan. To be in Gold or in any other biz you must make decisions involving some risk. All aspects should be measured to keep 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? & are they clearly understood & planned for? All the risks should be taken care of in your Gold plan.

2. Do you grade the risks faced by you when trading in a structured way? - Do you have a plan? - have you read about this course which is extensively covered discussed here on this Web Site.

3. Do you know the maximum potential risk of each exposure for each transaction which you place?

4. Are decisions made on the basis of reliable & timely data and based on a strategy or not? Have you read about systems here on this web site guide lessons.

5. Are the risks big 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 the risks of your trading activities exist? - Do you hold trades longterm or short-term? what type of trader are you?

7. Are the exposures a one-off or are they recurring?

8. Do you know enough about methods in which your Gold risks can be reduced or hedged and what it would cost if you did not include these measures to reduce potential loss, and what impact would it make to any upside of your profit?

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

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