Draw-down and Maximum DrawDown - Equity Management in Gold Trading

In a business so as to make profit one must learn how to manage the risks. To earn profits in Gold trading you as a trader need to learn about the different money management strategies discussed on this learn Gold trading website.

When it comes to XAUUSD trading, risks to be managed are the potential trading losses. Using equity money management rules will not only protect your account but will also serve to make you profitable in the longterm.

Draw-down

As Gold traders the number one risk in Gold trading is known as draw-down - this is the sum of money you have lost in your trading account on a single Gold trade.

If you have $50,000 capital and you accrue a loss in a single transaction of $500 dollars, then your draw down is $500 divided by $50,000 dollars which is 1 percent% draw down.

Maximum Draw-down

This is the overall total amount of money you have lost in your account before you begin making profitable trades. For example if you have $50,000 capital and make 5 consecutive losing trade positions with a total of $2,500 loss before making 10 winning trades with a total of $5,000 dollars profit. Then the draw down is $2,500 divided by $50,000 dollars, which is 5 % maximum draw-down.

Gold Trading Drawdown vs Gold Trading Maximum Drawdown Difference Explained - What is Draw Down in XAUUSD Trading?

Draw Down on the example revealed above is $442.82 (4.4%)

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

To learn how to generate the above trading reports using MetaTrader 4 platform: You can search on how to generate trading reports on MetaTrader 4 Tutorials.

Equity Management Methods

The example below illustrates difference between risking a small percentage of your trading capital compared to risking a higher percentage of you trading capital. Good trading principles require you as an investor or a trader not to risk more than 2% of your total equity on any one single trade.

Percent Risk Method

Gold Trading Draw-down and Maximum Draw-down in Gold Trading

2% and 10% Risk Rule - Gold Trading Equity Management Rules

In trading, there's a big difference between risking 2% of your account equity compared to risking 10% of your account equity on one position.

If you happened to go through a losing streak when trading Gold and lost only 20 trades in a row, you would have gone from starting balance of $50,000 to having only $6,750 left in your account if you risked 10% on each position. You would have lost over 87.5% of your trading equity.

However, if you risked only 2 % when placing the trades, you'd still have had $34,055 dollars which is only a 32 % loss of your total trading equity.

This is why it is best to use the 2 % risk management strategy

The difference between risking 2% and 10% is that if you risked 2% per every trade you would still have $34,055 after 20 losing trades.However, if you risked 10% per trade you would only have $32,805 after only 5 losing trades & that's less than what you'd have had if you risked only 2 % of your account and lost all 20 trades.

The point is that you want to setup your equity money management rules so that as when you do have a loss making period, you'll still have enough trading capital to trade the next time.

If you lost 87.5% of your trading account capital you'd have to make 640 % profit on your remaining account balance just to get back to break-even.

As when compared and analyzed to if you lost 32% of your trading capital you'd have to make 47 % profit on your remaining account balance just to get back to break-even. To compare this with the above example, 47% maximum draw-down is much easier to break-even than 640% maximum draw down is.

The chart below shows what percentage of your trading equity you would have to make so as to get back to break-even if you were to lose a certain percent% of your trading capital.

Concept of BreakEven

Gold Trading Drawdown and Maximum Drawdown in Gold Trading - What is Draw Down in Gold Trading?

Account Equity and Concept of Break Even

At 50% draw down, a gold trader would have to earn 100% on their remaining trading capital - a feat that is accomplished by less than 5% of all traders globally - just to break-even on an account with a 50% loss.

At 80 % draw down, a xauusd trader must quadruple their account equity just to bring it back to its original equity level. This is what is referred to as "break-even" i.e. Get back to your original account balance that you deposited after making a draw down.

The more you lose, the harder it is to make it back to your original trading equity.

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

Money management is about only risking a small percentage of your trading capital in each transaction so that you can survive your losing streaks and avoid a large draw-down on your trading account.

In trading, traders use stop losses which are set in order to cap losses. Controlling risks involves putting a stop loss order after opening an order.

Effective Equity Management

Effective risk management strategy requires controlling all the trading risks. One should come up with a clear equity money management system and a trading plan. To be in XAUUSD trading business or in any other type of business you must make some decisions which involve some type of risk. All factors should be measured to keep risk to a minimum when trading Gold online and make sure you use the above tips on this guide.

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