Trading Indices Risk Management & Stock Indices Money Management Strategies
Trading Indices Risk Management Strategies
In any business, in order to make profit a trader must learn how to manage the 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 guide web site.
When it comes to 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 trading indices is known as drawdown - this is the amount of money you've lost in your stock indices trading account on a single indices trade.
If you have $10,000 indices trading capital & 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 & Stock Indices Money Management Strategies
This is the total amount of money you've lost in your indices account before you begin making profitable stock indices trades. For examples if you have $10,000 in trading indices capital & make 5 consecutive losing indices trades with a total of $1,500 indices loss before making 10 winning stock indices trades with a total of $4,000 indices profit. Then the indices drawdown is $1,500 divided by $10,000, which is 15% maximum indices draw down.
Indices Draw Down is $442.82 (4.40%)
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 in MT4 Tutorial - Draw-Down Indices Risk Management Calculator
Trading Stock Indices Risk Management Strategies
The in trading indices examples explained below shows the difference between risking a small percent of your indices trading capital compared to risking a higher percentage. Good Trading Indices Risk Management Strategies principles requires you as a trader not to risk more than 2% of your total indices account equity on any one single indices trade.
Indices Percentage Risk Method
2% & 10% Indices Trading Money Management Rule - Trading Indices Risk Management Strategies - How to Trade Management Strategies for Trading Indices
There's 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 & lost only 20 stock indices trades in a row, you would have gone from beginning indices trading account balance of $50,000 to having only $6,750 left in your stock indices trading account if you risked 10 % on each indices trade. 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's best to use 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 account after 20 losing trades.
However, if you risked 10% you would only have $32,805 in your indices account after only 5 losing indices trades that is less than what you would have in your stock indices trading account if you risked only 2 % of your stock indices account & lost all 20 indices trade transactions.
The point is you want to setup your Trading Indices Risk Management Strategies rules so that when you do have a loss making period, you'll still have enough in trading indices capital to trade next time.
If you lost 87.50% of your in trading indices capital you would have to make 640% profit to get back to break even.
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 break-even. To compare it with the indices example 47% is much easier to break-even than 640% is.
Chart below shows what percentage you would have to make so that you get back to break even if you were to lose a certain percent of your in trading indices capital.
Concept of Break Even - DrawDown Indices Risk Management Chart
Stock Indices Account Equity and Break Even - Trading Indices Risk Management & Stock Indices Money Management Methods - 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 balance that you started with.
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 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 trade so that you can survive your losing streaks and avoid a large drawdown on your stock indices trading account.
In trading indices, traders use indices stop loss orders which are put so as to minimize indices losses. Controlling risks in trading indices involves putting a stoploss order after placing an new stock indices order.
Effective Indices Risk Management
Effective in trading indices risk management requires controlling all risks in trading indices and a 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 interpreted to keep risk to a minimum and use 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 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 indices market information & based on in trading indices strategy or not? Have you read about in indices trading systems on this learn indices website.
5. Are the indices risks big 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 trades 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 about methods in which trading indices risks can be reduced or hedged and what it would cost in terms of profit if you didn't include these measures to reduce potential loss, & what impact would it make to any upside of your indices profit?
9. Have your indices trading money management rules been addressed adequately, to ensure that in stock indices trading you make and keep your indices profits.
Trading Indices Risk Management & Indices Trading Money Management Methods - DrawDown Indices Risk Management Chart - DrawDown Indices Risk Management Calculator
