Trading Money Management and Stock Money Management Strategies
Trading Money Management Strategies
In any business, in order to make profit a trader must learn how to manage the risks. To make profits in trading you need to learn about the various trading money management strategies explained on this learn trading lesson web site.
In trading, the risks to be managed are potential losses. Using risk management guidelines will not only protect your trading account but also make you profitable in the long run.
What is Draw Down in Stock Indices Trading?
As traders the number one risk in trading stock indices is referred to as draw-down - this is the amount of money you have lost in your account on a single trade.
If you have $10,000 indices capital and you make a loss in a single trade of $500, then your draw down is $500 divided by $10,000 which is 5 percent stock indices draw down.
Trading Money Management and Stock Money Management Strategies
This is the total sum of money you have lost in your account before you start making profitable stock trades. For example, if you have $10,000 in trading capital and make five consecutive losing trades with a total of $1,500 indices loss before making 10 winning stock trades with a total of $4,000 indices profit. Then the draw-down is $1,500 divided by $10,000, which is 15% maximum draw down.
Indices Draw Down is $442.82 (4.40%)
Maximum Draw-Down is $1,499.39 (13.56 %)
To learn how to generate the above in trading reports using MT4 platform: Generate Indices Reports in MT4 Tutorial - Draw-Down Money Management Calculator
Trading Stock Money Management Strategies
The in trading examples explained below shows the difference between risking a small percent of your capital compared to risking a higher %. Good Trading Money Management Strategies principles requires you as a trader not to risk more than 2 percent of your total account equity on any one single trade.
Indices % Risk Method
2 percent and 10 percent Money Management Rule - Trading Money Management Strategies - How to Trade Management Strategies for Indices
There's a big contrast between risking 2 percent of your trading account equity compared to risking 10 percent of your equity on one trade.
If you happened to go through a losing indices streak & lost only 20 stock trades in a row, you would have gone from beginning trading account equity balance of $50,000 to only having $6,750 left in your stock account if you risked 10 % on each trade. You would have lost over 87.50 % of your account equity.
However, if you only risked 2 % you would have still had $34,055 in your trading account which is only a 32 percent loss of your total account equity. This is why it's best to use 2 percent risk management strategy in trading indices.
The difference between risking 2 % & 10 % on one trade is that if you risked 2 % you would still have $34,055 in your trading account after 20 losing trade transactions.
However, if you risked 10 % you would have only $32,805 in your trading account after only 5 losing trades that's less than what you would have in your stock account if you risked only 2 % of your stock account & lost all 20 trades.
The point is that you want to setup your Trading Money Management Strategies guidelines so that when you do have a loss making period, you'll still have enough in trading capital to trade the next time.
If you lost 87.50 % of your in trading capital you'd have to make 640% profit to get back to break even.
As compared to if you lost 32 percent of your in trading 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 shows what percentage you'd have to make so that you get back to break even if you were to lose a certain percent of your in trading capital.
Concept of BreakEven - DrawDown Money Management Chart
Account Equity & Break Even - Trading Money Management and Stock Money Management Strategies Methods - Draw Down Money Management Chart
At 50% stock indices draw down, one would have to earn 100% on their invested capital - a task accomplished by less than 5 percent of all traders world-wide - just to breakeven on a account with a 50% loss.
At 80% stock indices draw down, a trader must quadruple their trade equity just to bring it back to its original equity. This is what is referred to as to "breakeven" - which means - get back to your original trade balance that you started with.
The more 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 trading account equity. Do not accept to lose more than 2% of your account equity on any one single trade.
Indices Money management is about only risking a small percentage of your capital in each trade so that you can survive your losing streaks and avoid a large draw down on your stock account.
In trading stock indices, traders use stop losses which are put so as to minimize losses. Controlling risks in trading involves putting a stoploss order after placing an new stock order.
Effective Risk Management
Effective in trading risk management requires controlling all risks in trading indices & a trader should come up with a equity management system & a funds management in trading plan. To be in trading or any other biz you must make some decisions involving some risk. All in trading factors should be interpreted to keep risk to a minimum & use above money management tips on this article - Draw-Down Risk Management Chart.
Ask yourself? Some Tips
1. Can the risks to your in trading activities be identified, what forms do they take? & are these clearly understood & planned for in your in trading plan? All the risks should be taken care of in your in trading plan.
2. Do you grade the trading risks encountered by you when in trading indices in a structured way? - Do you have a equity management strategy and a in trading plan? have you read about this learn in trading topic which is well covered explained here on this learn trading site for beginner traders.
3. Do you know max potential risk of each exposure for each trade that you place?
4. Are trading decisions made on basis of reliable & timely market information & based on in trading strategy or not? Have you read about in systems on this learn website.
5. Are the risks big in relation to the trade turnover of your invested capital and what impact could they have on your profits margins & your account margin requirements?
6. Over what time periods does the in trading risks of your in trading activities exist? - Do you hold in trading trades long-term or short-term? what type of trader are you?
7. Are the exposures in trading a one off or they--areare--they recurring?
8. Do you know about methods in which trading risks can be reduced or hedged and what it would cost in terms of profit if you didn't include these measures to cap the potential loss, and what impact would it make to any upside of your profit?
9. Have your trading equity management guide-lines been addressed adequately, to ensure that in stock indices trading you make and keep your profits.
Trading Money Management and Money Management Strategies Methods - DrawDown Risk Management Chart - DrawDown Money Management Calculator
