# Draw Down and Maximum Draw-down

In a business in order to make profit one must learn how to manage risks. To make profits in trading you need to learn about the various indices trading money management strategies discussed on this best learn Indices tutorial website.

When it comes to trading, the risks to be managed are potential losses. Using indices trading money management rules will not only protect your Indices trading 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 Indices trading account on a single indices trading transaction.

If you have $10,000 capital and you make a loss in a single transaction of $500, then your draw-down 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 Indices trading account before you start making profitable trades. For example if you have $10,000 capital and make 5 consecutive losing positions with a total of $1,500 loss before making 10 winning positions with a total of $4,000 profit. Then the draw-down is $1,500 divided by $10,000, which is 15 % maximum draw-down.

**Draw Down is $442.82 (4.4%)**

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

To learn how to generate the above reports using MT4 platform: Generate Reports on MetaTrader 4 Indices Trading Platform Tutorial

## Indices Trading Money Management

The example illustrated and explained below shows the difference between risking a small percentage of your capital compared to risking a higher percentage. Good investment principles requires you as an investor not to risk more than 2% of your total account equity.

**Percent Risk Method**

**2% and 10% Risk Rule**

There is a big 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 would have gone from starting balance of **$50,000** to having only **$6,750** left if you risked** 10%** on each transaction. You would have lost over **87.5%** of your equity.

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

The difference between risking **2%** and **10%** is that if you risked **2%** you would 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 is less than what you would have if you risked only **2%** of your account and **lost all 20 trades**.

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

If you lost **87.5%** of your capital you would have to make** 640%** profit to get back to breakeven.

As compared to if you lost **32%** of your capital you would have to make **47%** profit to get back to breakeven. To compare it with the example** 47%** is much easier to breakeven than **640%** is.

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

**Concept of Break Even**

**Account Equity and 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 worldwide - just to breakeven on an account with a **50% loss**.

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

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

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

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

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

# Effective Risk Management

Effective risk management requires controlling all the risks. One should come up with a clear indices trading money management system and a plan. To be in Indices or any other business you must make decisions involving some risk. All factors should be measured to keep risk to a minimum and use the above tips on this article.

Ask yourself? Some Tips

1. Can the risks to your investing activities be identified, what forms do they take? and are they clearly understood and planned for? All the risks should be taken care of in your Indices 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 topic which is thoroughly 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 the basis of reliable and timely information and based on a strategy or not? Have you read about Indices trading systems here on this website tutorial lessons.

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

6. Over what time periods do the risks of your trading activities exist? Do you hold positions long term 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 the ways in which your Indices 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 it would make to any upside of your profit?

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