Trading Indices Risk Management and Stock Indexes Money Management Strategies
Trading Indices Risk Management Strategies
In any business, in order to make a profit one must learn how to manage risks. To make profits in trading indices you need to learn about the various indices trading money management strategies discussed on this learn trading indices tutorial website.
When it comes to indices trading, the risks to be managed are potential losses. Using indices risk management rules will not only protect your indices trading account but also make you profitable in the long run.
What is Draw Down?
As indices traders the number one risk in trading indices is known as draw down - this is the amount of money you have lost in your stock indexes trading account on a single indices trade.
If you have $10,000 indices trading capital and you make a indices loss in a single indices trade of $500, then your indices draw down is $500 divided by $10,000 which is 5% indices draw down.
Trading Indices Risk Management and Stock Indexes Money Management Strategies
This is the total amount of money you have lost in your indices trade account before you start making profitable stock indexes trades. For example if you have $10,000 in trading indices capital and make 5 consecutive losing indices trade positions with a total of $1,500 indices loss before making 10 winning stock indexes trades with a total of $4,000 indices profit. Then the indices draw down is $1,500 divided by $10,000, which is 15% maximum indices draw down.
Indices Draw Down is $442.82 (4.4%)
Maximum Indices Draw Down is $1,499.39 (13.56%)
To learn how to generate the above in trading indices reports using MetaTrader 4 indices platform: Generate Indices Trading Reports on MetaTrader 4 Tutorial - Draw Down Indices Risk Management Chart - Draw Down Indices Risk Management Calculator
Trading Indices Risk Management Strategies
The in trading indices example explained and illustrated below shows the difference between risking a small percent of your indices trading capital compared to risking a higher percent. Good Trading Indices Risk Management Strategies principles requires you as a indices trader not to risk more than 2% of your total indices trading account equity on any one single indices trade.
Indices Percent Risk Method
2% and 10% Indices Trading Money Management Rule - Trading Indices Risk Management Strategies - Indices Trade Management Strategies for Trading Indices
There is a big difference between risking 2% of your indices trading account equity compared to risking 10% of your equity on a single indices trade.
If you happened to go through a losing indices streak and lost only 20 stock indexes trades in a row, you would have gone from starting indices trading account balance of $50,000 to having only $6,750 left in your stock indexes trading account if you risked 10% on each indices trade. You would have lost over 87.5% of your indices trading account equity.
However, if you risked only 2% you would have still had $34,055 in your indices trading account which is only a 32% loss of your total indices trading account equity. This is why it's best to use the 2% risk management strategy in trading indices.
The difference between risking 2% and 10% on a single indices trade is that if you risked 2% you would still have $34,055 in your indices trading account after 20 losing trades.
However, if you risked 10% you would only have $32,805 in your indices trading account after only 5 losing indices trades that is less than what you would have in your stock indexes trading account if you risked only 2% of your stock indexes trading account and lost all 20 indices trade transactions.
The point is that you want to setup your Trading Indices Risk Management Strategies rules so that when you do have a loss making period, you will still have enough in trading indices capital to trade next time.
If you lost 87.5% of your in trading indices capital you would have to make 640% profit to get back to breakeven.
As compared to if you lost 32% of your in trading indices capital you would have to make 47% profit to get back to the breakeven. To compare it with the indices example 47% is much easier to breakeven than 640% is.
The trading 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 in trading indices capital.
Concept of Break Even - Draw Down Indices Risk Management Chart
Stock Indexes Account Equity and Break Even - Trading Indices Risk Management and Stock Indexes Money Management Strategies - Draw Down Indices Risk Management Chart
At 50% indices draw down, one would have to earn 100% on their invested indices capital - a feat accomplished by less than 5% of all indices traders worldwide - just to breakeven on a indices trading account with a 50% loss.
At 80% indices draw down, one must quadruple their indices trading equity just to bring it back to its original equity. This is what is known as to "breakeven" - which means - get back to your original indices trading account balance that you started with.
The more money you lose, the harder it is to make it back to your original indices trading account size.
This is why as a indices trader you should do everything you can to PROTECT your indices trading account equity. Do not accept to lose more than 2% of your indices trading account equity on any 1 single indices trade.
Indices Money management is about only risking a small percentage of your indices capital in each indices trade so that you can survive your losing streaks and avoid a large draw down on your stock indexes trading account.
in trading indices, traders use indices stop loss trading orders which are put in order to minimize indices losses. Controlling risks in trading indices involves putting a indices stop loss indices trading order after placing an new stock indices order.
Effective Indices Risk Management
Effective in trading indices risk management requires controlling all the risks in trading indices and a indices trader should come up with a money management indices system and a money management in trading indices plan. To be in trading indices or any other business you must make decisions involving some risk. All in trading indices factors should be analyzed to keep risk to a minimum and use the above indices money management tips on this article - Draw Down Indices Risk Management Chart.
Ask yourself? Some Indices Trading Tips
1. Can the indices risks to your in trading indices activities be identified, what forms do they take? and are these clearly understood and planned for in your in trading indices plan? All the indices risks should be taken care of in your in trading indices plan.
2. Do you grade the trading risks encountered by you when in trading indices in a structured way? - Do you have a money management strategy and a in trading indices plan? have you read about this learn in trading indices topic which is well covered explained here on this learn trading indices website for beginner stock indexes traders.
3. Do you know the maximum potential trading risk of each exposure for each indices trade that you place?
4. Are trading decisions made on the basis of reliable and timely indices market information and based on a in trading indices strategy or not? Have you read about in indices trading systems on this learn indices website.
5. Are the indices risks large in relation to the trade turnover of your invested indices capital and what impact could they have on your indices profits margins and your indices trading account margin requirements?
6. Over what time periods do the in trading indices risks of your in trading indices activities exist? - Do you hold in trading indices positions long term or short term? what type of indices trader are you?
7. Are the exposures in trading a one-off or are they recurring?
8. Do you know enough about the methods in which trading indices risks can be reduced or hedged and what it would cost in terms of profit if you did not include these measures to reduce potential loss, and what impact it would make to any upside of your indices profit?
9. Have your indices trading money management rules been adequately addressed, to ensure that you make and keep your in trading indices profits.
Trading Indices Risk Management and Indices Trading Money Management Strategies - Draw Down Indices Trading Risk Management Chart - Draw Down Indices Trading Risk Management Calculator
