Money Management In Gold Trading

2.  Draw-down And Maximum Draw-down
 Money Management Methods
 Gold Trading Money Management Rules
 Concept Of Break Even
 Money Management Styles And Methods In
Gold Trading
 High Risk: Reward Ratio

3.  In a business in order to make profit one must
learn how to manage risks.
 To make profits in Gold trading you need to learn
about the various money management strategies
discussed on this learn Gold trading website.
 When it comes to Gold trading, the risks to be
managed are potential losses.
 Using money management rules will not only
protect your trading account but also make you
profitable in the long run.

4.  As Gold traders the number one risk in
Gold trading is known as draw-down - this
is the amount of money you have lost in
your trading account on a single Gold
trade transaction.
 If you have $50,000 capital and you make
a loss in a single transaction of $500, then
your draw-down is $500 divided by
$50,000 which is 1 % draw-down.

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

6.  Draw Down in the example 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 MT4 Tutorials.

7.  The example in next slide shows the
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 account equity on any one single
trade.

9.  In trading, there is a big difference between risking
2% of your account equity compared to risking 10%
of your account equity on a single trade transaction.
 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 trading account if you
risked 10% on each trade transaction.
 You would have lost over 87.5% of your account
equity.
 However, if you risked only 2% when placing the
trades, you would still have had $34,055 which is
only a 32% loss of your total account equity.
 This is why it is best to use the 2% risk
management strategy

10.  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 and that is less than what you
would have had if you risked only 2% of your account and lost all
20 trades.
 The point is that you want to setup your money management
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 87.5% of your account capital you would have to make
640% profit on your remaining balance to get back to break
even.
 As when compared to if you lost 32% of your trading capital you
would have to make 47% profit on your remaining balance to get
back to break even. To compare this with the above example,
47% maximum draw down is much easier to breakeven than
640% maximum draw down is.

11. The chart below shows what percentage of your account equity you
would have to make to get back to breakeven if you were to lose a
certain percentage of your trading capital.

12.  At 50% draw down, a trader would have to earn 100% on their
remaining capital - a feat accomplished by less than 5% of all
online traders worldwide - just to breakeven on an account with a
50% loss.
 At 80% draw down, a trader must quadruple their account equity
just to bring it back to its original equity. This is what is known 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 account equity.
 This is the reason why as a trader you should do everything you
can to PROTECT your account equity. Do not accept to lose more
than 2% of your equity on any 1 single trade transaction.
 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 loss orders which are placed in order
to minimize losses. Controlling risks involves putting a stop loss
order after opening an order.

13.  Effective risk management requires
controlling all the trading risks. A trader
should come up with a clearn money
management system and a trading plan.
 To be in Gold trading business or any
other business you must make decisions
involving some 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 article.

14.  The best way to practice successful
money management in Gold
trading is for a trader to keep losses
lower than the profits they make
when trading.
 This is called risk to reward ratio.

15.  This risk: reward ratio method is used to
increase the profitability of an investment
strategy by trading only when you have
the potential to make more than 3 times
what you are risking when opening a Gold
trade.
 If you invest using a high risk reward ratio
of 3:1 or more, you significantly increase
your chances of becoming profitable in
the long run when trading Gold metal.

16.  The chart below shows you how this concept works:

17.  In the last slide in the first example, you can see that even if you only won
50% of your XAUUSD trade transactions, you would still make a profit of
$10,000. Even if your win rate went lower to about 30% you would still end
up profitable as shown on the second example above.
 Just remember that whenever you have a good risk: reward ratios, your
chances of being profitable are much greater even if you have a lower win
percentage.
 Never use a risk: ratio where you can lose more pips on one trade than you
plan to make. It does not make sense to risk 1,000 dollars in order to make
only 100 dollars.
 Because you have to win 10 times more to make 1,000 dollars back even if
you lost only 1 trade.
 If you ONLY lose once you have to give back all your profits from the other
ten winning trades.
 This type of investment strategy makes no sense and you will lose in the
long term, guaranteed!

18.  The percentage risk method is a method where you
risk the same percentage of your account balance per
every transaction.
 Percentage risk based method specifies that there will
be a certain percentage of your account equity
balance that is at risk per trade.
 To calculate the percent per every trade transaction,
you need to know two things, the percentage risk
that you've chosen and lot size of an open order so as
to calculate where to put the stop loss order.
 Since the percent is known, we shall use it to
calculate the lot size of the order to be placed in the
market; this is known as position size.

19.  If you have an account balance of
$50,000 in your account and risk
percent is 2%
 Then 2 % is equal to $1,000
 If three investors buy XAUUSD and the
first one is using 100 pips stop loss,
second one is using 200 points stop,
third one is using 250 points stop, and
their position size will be:

20. Example 1:
 Stop loss = 100 pips
 Risk percent = 2 % = $1,000
 100 pips = $1,000
 1 point =1,000/100= $10
 Position size is 10 lots (for 10 Gold lots 1 point
movement =$ 10)
Example 2:
 Stop loss = 200 pips
 2 % = $1,000
 200 pips = $1,000
 1 point =1,000/200= $5
 Position size is 5 lots (for 5 Gold lots 1 point
movement =$ 5)

21. Example 3:
 Stop loss = 250 pips
 2 % = $1,000
 250 pips = $1,000
 1 point =1,000/250= $4
 Position size is 4 lots (for 4 Gold lots 1 point movement =$
4)
Example: If a trader with $50,000 wants to calculate annual
income from his strategy
 Annual income: If your trading system has a win ratio of
70% and your risk reward is 3:1, and your stop loss is 100
pips and take profit is 300 pips and every month you make
100 trade transactions trading standard lots, then your
maximum annual income will be about:
 For 1 standard XAUUSD lot profit per 1 pip is $1
 100 transactions*12 months = 1,200 transactions

22. Wins and Profit
 70% win: 70% of 1,200 = 840 profitable transactions
 840 transactions * 300 pips = 252, 000 pips
 252,000 pips = $252,000
Losses
 30% losses: 30% of 1200 = 360 losing transactions
 360 transactions * 100 pips = 36,000 pips
 36,000 pips = $36,000
Net Profit = 252,000 - 36,000 = 216,000 pips
 Income: 216,000 pips = $216,000
 The above is just an example of the amount you will make
that will depend on the risk: reward ratio of your Gold
trading system along with its win percentage ratio.