Stock Capital Management Strategies for Serious Traders in Indices Trading
Proper Stock Funds Management Money Management Indices Guide
In any business, so that to make a profit one must learn how to manage risks. To make profits in trade you need to learn about the various risk management strategies discussed on this best learn tutorial web-site.
In online trading, the risks to be managed are potential losses. Using risk management principles will not only protect your account but also make you profitable in the longterm.
What is DrawDown in Indices Trading?
As traders the number one risk in indices trading is referred to as draw-down - this is the amount of money you have lost in your account on a single position.
If you have $10,000 trade capital and you accrue a loss in one trade of $500 dollars, then your draw-down is $500 divided by $10,000 dollars which is 5 percent% trade draw down.
Stock Equity Management Strategies for Serious Traders in Indices Trading
This is the total sum of money you've lost in your account before you begin making profitable stock trades. For example, if you have $10,000 trade capital and make 5 consecutive losing trades with a total of $1,500 loss before making 10 winning stock trades with a total of $4,000 profit. Then the trading maximum draw-down is $1,500 dollars divided by $10,000, which is 15 % maximum trade draw down.
Indices DrawDown is $442.82 dollars (4.40 %)
Maximum DrawDown is $1,499.39 dollars (13.56%)
To learn how to generate the above trade reports using MT4 platform: Generate Indices Reports on MetaTrader 4 Tutorial - Equity Management in PDF - Rules of Money Management in Indices Trading
Proper Stock Funds Management Money Management Indices Guide
The trading examples explained below shows the difference between risking a small percent of your capital compared to risking a higher %. Good Draw Down and Money Management in Market principles requires you as a trader not to risk more than 2 percent of your total trading account equity on any one single trade transaction.
Indices Percent Risk Method
2 percent and 10 percent Risk Management Rule - How to Draw Down and Money Management in Market - Proper Risk Management Money Management Indices Guide
There's a big difference between risking two percentage% of your equity compared to risking 10 percentage% of your capital on a single trade transaction.
If you happened to go through a losing stock indices streak and lost only 20 stock trades in a row, you would have gone from a beginning equity balance of $50,000 to only having $6,750 dollars left in your trading account if you risked 10 % on each trade position. You would have lost over 87.5 % of your account equity.
However, if you risked only 2 % you would have still had $34,055 in your trading account which is only a 32 percentage loss of your total account equity. This is why it is best to use the 2 percent indices risk management strategy in stock indices trading.
Difference between risking 2 % and 10% on a single trade is that if you risked 2 % you would still have $34,055 in your account after 20 losing trade transactions.
However, if you risked 10 % you would only have $32,805 in your trading account after only 5 losing trades that is less than what you would have in your account if you risked only 2% of your trading account & lost all 20 trade transactions.
The point is that you want to setup your Draw Down and Money Management in Market guide-lines so that when you do have a loss making period, you'll still have enough trade capital to open a trade the next time.
If you lost 87.5% of your trade capital you would have to make 640 % profit to get back to break even.
As compared to if you lost 32% of your trade capital you'd have to make 47% profit to get back to the break-even. To compare it with the example 47 % is much easier to break-even than 640% is.
Chart below illustrates what percentage% you would have to make so that you get back to break even if you were to lose a certain percentage% of your capital.
Concept of BreakEven - Equity Management in Guide
Account Equity and Break Even - Equity Management Strategies for Serious Traders in Indices - Equity Management in Guide
At 50% draw-down, a stock indices trader would have to earn 100% on their invested trade capital - a feat accomplished by less than 5 percentage% of all traders world-wide - just to breakeven on a trading account with a 50 % loss.
At 80% draw down, a stock indices trader must quadruple their trade equity just to bring it back to its original equity. This is what is known as to "break-even" - which means - get back to your original trading equity balance that you started with.
The greater the money you lose, harder it is to make it back to your original account size.
This is why you should do everything you can to PROTECT your account equity. Do not accept to lose more than 2% of your trading account equity on any one single trade transaction.
Indices Money management is about only risking a small percentage of your trade capital in each trade so that you can survive your losing streaks & avoid a big draw-down on your trade account.
In trading, traders use stop loss orders that are put in order to cap losses. Controlling risks in indices involves setting a stop order after placing an new stock trade order.
Effective Equity Management
Effective trading risk management requires controlling all the risks in stock indices trading & a stock indices trader should create a risk management system and a risk management plan. To be in trade or any other business you must make some decisions involving some risk. All factors should be interpreted to keep risk to a minimum and use above risk management tips on this learn lesson - Funds Management in Tutorial.
Ask yourself? Some Tips
1. Can the risks to your trade activities be identified, what forms do they take? & are these clearly understood & planned for in your trade plan? All the risks should planned for in your plan.
2. Do you grade the trading risks encountered by you when indices trading in a structured way? - Do you have a risk management strategy & a trade plan? have you read about this learn tutorial which is well covered and discussed here on this learn web site for beginner traders.
3. Do you know maximum potential risk of each exposure for each trade that you place?
4. Are trading decisions made on basis of reliable & timely market information and based on strategy or not? Have you read about systems on this learn web site.
5. Are the risks big in relation to the trade turnover of your invested trade capital and what impact could they have on your profits margins & your trading account margin requirements?
6. Over what trading time periods do the trade risks of your trade activities exist? - Do you hold trade positions long-term or shortterm? what type of trader are you?
7. Are the exposures in trading a one off or are they recurring?
8. Do you know about techniques in which your risks can be reduced or hedged & what it would cost in terms of profit if you did not include these stipulated measures to minimize potential loss, and what impact would it make to any up side of your profit?
9. Have your risk management rules been adequately addressed, to ensure that you make & keep your profits.
Indices Equity Management Strategies for Serious Traders in Indices - Equity Management in PDF - Rules of Money Management in Indices Trading
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