What are Major Types of Indices Risks?
Indices Risk Management Strategy
In any business, so as to make a profit one must learn how to manage risks. To make profits in indices trading you need to learn about the various indices money management strategies discussed on this learn indices tutorial web-site.
When it comes to online indices trading, the risks to be managed are potential losses. Using indices risk management rules won't only protect your indices trading account but also make you profitable in the long run.
What is Draw Down in Stock Indices Trading?
As indices 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 stock indices trading account on a single indices trade transaction.
If you have $10,000 indices capital and you make a loss in a single indices trade transaction of $500, then your indices trading draw-down is $500 divided by $10,000 which is 5% draw down.
Maximum Draw Down
This is the total amount of money you have lost in your stock indices trading account before you begin making profitable stock indices trades. For examples if you have $10,000 indices trading capital and make 5 consecutive losing indices trade positions with a total of $1,500 loss before making 10 winning stock indices trades with a total of $4,000 profit. Then the indices drawdown is $1,500 divided by $10,000, which is 15% maximum draw down.
DrawDown is $442.82 (4.4%)
Maximum DrawDown is $1,499.39 (13.56 %)
To learn how to generate the above reports using MT4 indices trading platform: Generate Indices Trading Reports on MT4 Course - Trading with Tools of Indices Risk Management - Indices Trading Risk Management Calculator
Indices Risk Management Strategy
The example explained and illustrated below shows the difference between risking a small percentage of your indices capital compared to risking a higher percentage. Good Indices Trading Risk Management Strategy principles requires you as an investor not to risk more than 2% of your total indices account equity on any one single indices trade.
Indices Percentage Risk Method
2% & 10% Stock Indices Money Management Rule - Indices Risk Management Strategy - The Indices Trading Risk Management Guide
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 transaction.
If you happened to go through a losing streak & lost only 20 stock indices trades in a row, you would have gone from beginning indices account balance of $50,000 to having only $6,750 left in your stock indices account if you risked 10% on each indices trade transaction. You would have lost over 87.50% 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 is best to use 2% risk management strategy in stock indices trading.
Difference between risking 2 % and 10 % on a single indices trade transaction 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 trade transactions that is less than what you would have in your stock indices account if you risked only 2% of your stock indices trading account & lost all 20 indices trade transactions.
The point is that you want to setup your Indices Trading Risk Management Strategy rules so that when you do have a loss making period, you will still have enough indices trading capital to trade next time.
If you lost 87.5% of your indices trading capital you would have to make 640 % profit to get back to break even.
As compared to if you lost 32 % of your indices trading capital you would have to make 47% profit to get back to breakeven. To compare it with the indices example 47 % is much easier to break-even than 640% is.
Chart below shows what percent you would have to make so that you get back to break even if you were to lose a certain percent of your indices trading capital.
Concept of Break Even - Trading with Tools of Indices Risk Management
Stock Indices Account Equity and Break Even - What are Major Types of Stock Indices Risks? - Trading with Tools of Indices Risk Management
At 50% indices drawdown, one would have to earn 100% on their invested indices trading capital - a feat accomplished by less than 5% of all indices traders worldwide - just to breakeven on a indices 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 called to "breakeven" - which means - get back to your original indices trading account balance that you deposited.
The more money you lose, harder it is to make it back to your original indices trading account size.
This is why as a 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 account equity on any 1 single indices trade.
Indices Money management is about only risking a small percentage of your indices capital in each trade transaction so that you can survive your losing streaks and avoid a big draw-down on your stock indices trading account.
In indices trading, traders use indices stop-loss orders that are put in order to minimize indices losses. Controlling risks in indices trading involves putting a stop-loss order after placing an new stock indices trading order.
Effective Stock Indices Risk Management
Effective indices trading risk management requires controlling all the risks in trading & a trader should come up with a money management indices system & a money management indices plan. To be in indices trading or any other business you must make decisions involving some risk. All indices trading factors should be interpreted to keep risk to a minimum and use above indices money management tips on this article - Trading with Tools of Indices Risk Management.
Ask yourself? Some Tips
1. Can the risks to your indices investing activities be identified, what forms do they take? and are these clearly understood and planned for? All the indices risks should be taken care of in your indices trading plan.
2. Do you grade the trading risks encountered by you when indices trading in a structured way? - Do you have a indices trading plan? have you read about this learn indices trading topic which is thoroughly covered discussed here on this learn indices web site.
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 & based on indices trading strategy or not? Have you read about indices trading systems here on this learn indices website tutorial lessons.
5. Are the indices risks large in relation to the turnover of your invested indices capital and what impact could they have on your indices profits margins & your indices trading account margin requirements?
6. Over what trading time periods do the trading risks of your indices trading activities exist? - Do you hold indices trade positions long-term or short-term? what type of indices trader are you?
7. Are the exposures in trading a one off or they are recurring?
8. Do you know enough about the ways in which your indices trading risks can be reduced or hedged & what it would cost in terms of profit if you did not include these stipulated measures to reduce potential loss, and what impact would it make to any up side of your indices profit?
9. Have your indices money management rules been adequately formulated, to ensure that you make and keep your indices trading profits.
