DrawDown vs Maximum Draw-down

In business in order to make a profit one must learn how to manage risks. To make profits in trading you need to learn about various oil money management strategies explained on this learn Oil Trading tutorial website.

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

Draw-down

As traders the number one trading risk is known as draw-down - this is the sum of money you've lost in your account on one oil transaction.

If you have $10,000 capital and you make a loss in one trade of $500, then your drawdown is $500 divided by $10,000 which is 5 % draw-down.

Maximum Draw-down

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

DrawDown is $442.82 (4.40%)

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

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

Oil Trading Money Management

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

Percent Risk Technique

2% & 10% Risk Rule

There's a large difference between risking 2 % of your equity compared to risking 10% of your equity on a single transaction.

If you happened to go through a losing streak and lost only 20 trades in a row, you'd have gone from starting trading account balance of $50,000 to having only $6,750 left in your account if you risked 10 % on each trade transaction. You would have lost over 87.5% 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'd still have $34,055 after 20 losing trades.

However, if you risked 10 % you would only have $32,805 after only 5 losing trades that's less than what you would have if you risked only 2 % of your account and lost all 20 trades.

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

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

As compared to if you lost 32 % of your capital you would have to make 47% profit to go back to break even. To compare it with the examples 47 % is a lot easier to breakeven than 640% is.

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

Concept of Break Even

Account Equity & Break Even

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

At 80% draw-down, one must quadruple their equity just to bring it back to its initial equity. This is what is called to "break-even" i.e. Get back to your original trading account balance that you deposited.

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

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

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

In Oil, traders use stop loss orders which are put in order to minimize losses. Controlling risks it involves putting a stop loss order after placing an order.

Effective Risk Management

Effective risk management requires controlling all the trading risks. A trader should create a clear oil risk management system & a trading plan. To be in Oil Trading or in any other business you must make decisions involving some risk. All aspects should be measured to keep risk to a minimum & use the above tips on this guide.

Ask yourself? Some Tips

1. Can the risks to your investing activities be identified, what forms do they take? and are they clearly understood & planned for? All the risks should be taken care of in your Oil Trading plan.

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

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

4. Are decisions made on basis of reliable & timely data & based on a strategy or not? Have you read about trading systems here on this website guide tutorials.

5. Are the risks big in relation to the turnover of your invested capital and what impact could they have on your profits margins & your margin requirements?

6. Over what trading time periods do the risks of your trade activities exist? - Do you hold trades longterm or shortterm? what type of trader are you?

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

8. Do you know enough about the ways in which your Oil Trading risks can be reduced or hedged and what it would cost if you did not include these measures to reduce potential loss, & 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.