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.

When it comes to trading, the risks to be managed are potential losses. Using risk management rules won't only protect your 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 indices is known as drawdown - 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 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 begin making profitable stock trades. For examples 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 drawdown is $1,500 divided by $10,000, which is 15% maximum draw down.

Indices DrawDown 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 MetaTrader 4 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 balance of $50,000 to having only $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 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% and 10% on one trade is that if you risked 2% you would still have $34,055 in your account after 20 losing trades.

However, if you risked 10% you'd only have $32,805 in your 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 and lost all 20 trade transactions.

The point is 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 next time.

If you lost 87.50 % of your in trading 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 Break Even - DrawDown Money Management Chart

Account Equity and Break Even - Trading Money Management and Stock Money Management Strategies Methods - Draw Down Money Management Chart

At 50% 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% indices draw down, a trader must quadruple their trade 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 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 account equity. Do not accept to lose more than 2% of your account equity on any 1 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 indices, traders use stop loss orders 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 money management system & a money management in trading plan. To be in trading or any other business you must make decisions involving some risk. All in trading factors should be interpreted to keep risk to a minimum and 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 and 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 money 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 do 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 are 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 money 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