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'll 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 the potential trading losses. Using money management guidelines/rules will not only protect your trading account but will also serve to make you profitable over the long run.

Draw-down

As traders the No. one risk is known as drawdown - this is the amount of money you've lost in your account on a single gold transaction.

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

Maximum Draw-down

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

Relative Draw Down & Maximum Draw-Down in XAUUSD Gold

Draw Down is $442.82 (4.4%)

Maximum DrawDown is $1,499.39 (13.56%)

To learn how to generate the above trade reports using MT4 platform: Generate Reports in MT4 Lesson

XAU/USD Capital Management

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

Percentage Risk Strategy

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

2 percent & 10 percentage Risk Rule

There is a big difference between risking 2 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 trade positions 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 trade 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 on your account. This is why it's best to use the 2 percent risk management formula

The difference between risking 2% & 10 % is that if you risked 2% you'd 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 would have if you risked only 2 % of your trading account & lost all 20 trade positions.

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

If you lost 87.50% of your trading capital you'd have to earn 640 % profit just to get back to the break even.

As compared and analyzed to when if you lost 32 percentage of your trading capital you'd have to make 47 % profit just to get back to the break even. To compare it with the example illustration 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 trading capital.

Concept of Break Even

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

Account Equity & Break-Even

At 50% drawdown, a gold trader would have to make 100% on their invested trading capital - a task that is only accomplished by less than 5 % of all traders world wide - just to break-even on an account with a 50 % loss.

At 80 % drawdown, one must quadruple their equity just to bring it back to its starting equity level. This is what is called and known as - to "breakeven" - Go back to your initial trading account balance which you deposited.

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

This is the explanation why as a gold trader you should do everything you can to PROTECT your equity. Do not accept to lose more than 2 percent of your trading equity on any 1 single trade position.

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

In XAUUSD, traders use stop losses which are placed in order to cap losses. Controlling risks it involves putting and placing 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 & use the above tips on this course.

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