Trade Stock Indices

Draw Down vs Maximum Draw-down

In any business so as to make a profit one must learn how to manage the risks. In order to earn a profit in trading, a trader must first of all learn and also understand how to manage the market risks. To make profits when trading in tis online indices trading market - you need to learn about the various and different money management methods discussed and expounded on this Learn Stock Indices Trading Website.

In trading, the risk to be managed are potential losses. Using indices money management rules will not only protect your account but also serve to make you profitable in the long-run.

Draw-down

As traders the number one risk is referred to as draw-down - this is the sum of money you've lost on your account on a single trade transaction.

If you've got $10,000 capital and you make a loss in one trade of $500, then your draw down is $500 dollars divided by $10,000 which is 5 percent drawdown.

Maximum Draw-down

This is the total amount of money you have lost on your account before you begin earning profitable trade positions. For example, if you have $10,000 capital and make 5 consecutive losing trades with a total of $1,500 loss before making 10 winning trade positions with a total of $4,000 dollars profit. Then the draw down is $1,500 dollars divided by $10,000, which is 15% maximum drawdown.

Indices Money Management

Draw-Down is $442.82 dollars (4.40 %)

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

To learn and know how to get the above trading reports using MT4 software: Generate Reports on MT4 Tutorial

Indices Capital Management

The illustration explained below shows the difference between risking a small percentage of your trade capital in comparison to risking a higher %. Good investment principles requires you as a not to risk more than 2 percent of your total trading equity.

Percent Risk Technique

2% & 10Percent Risk Per Trading Strategy in Money Management

2 percent & 10 % Risk Rule

There is a big contrast between risking 2 % of your equity compared & analyzed to risking 10 % of your trade capital on a single trade.

If you happened to experience a losing streak & lost only 20 trade transactions on a row, you would have gone from beggining trading equity balance of $50,000 dollars to having only $6,750 dollars dollars left in your trading account if you risked 10% on every 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's best to use the 2 percent risk management method

The difference between risking 2% and 10% is that if you risked 2 % you would still have $34,055 after 20 losing trade transactions.

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

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

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

As compared & analyzed to if you lost 32 percent of your trade capital you would have to make 47 % profit to go back to the break-even. To compare & analyze it with the illustrations 47% is much easier to break even than 640% is.

Chart below shows what percent you would have to make to get back to break even if you were to lose a certain % of your trade capital.

Concept of Break-Even

Trading Account Equity and Break Even Strategy - Stock Money Management

Account Equity & Break-Even

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

At 80% draw-down, a trader must quadruple their equity just to bring it back to its initial 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's to make it back to your original account size.

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

Indices trading money management is about only risking a small percent of your trading capital in each trade so that you as a trader can survive your losing streaks and avoid a large draw down on your account.

In Indices, traders use stop loss stock orders which are put so as to cap losses. Controlling risks it involves putting a stop loss order after placing an order.

Effective Equity Management

Effective risk management requires controlling all the trading risks. One should create a clear indices trading money management system and a plan. To be in Indices or in any other biz you must make decisions which involve some risk. All aspects should be measured to keep risk to a minimum and use the above tips on this course.

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