Draw Down and Maximum Draw Down in Stocks Trading

Stocks Risk Management Strategies

In any business, so as to make a profit a trader must learn how to manage risks. To make profits in stocks trading you need to learn about the various stocks money management strategies discussed on this learn stocks trading tutorial website.

When it comes to stocks, the risks to be managed are potential losses. Using stocks trading risk management rules won't only protect your stocks account but also make you profitable in the long run.

Draw Down

As stocks traders the number one risk in stocks trading is known as draw-down - this is the amount of money you have lost in your stocks trading account on a single stocks trade.

If you have $10,000 stocks capital & you make a stocks trading loss in a single stocks trade of $500, then your stocks draw-down is $500 divided by $10,000 which is 5% stocks trading draw down.

Maximum Stock Trading Draw Down

This is the total amount of money you have lost in your stocks trading account before you start making profitable stock trades. For examples if you have $10,000 in stocks capital & make 5 consecutive losing stocks trades with a total of $1,500 stocks trading loss before making 10 winning stock trades with a total of $4,000 stocks trading profit. Then the stocks trading maximum drawdown is $1,500 divided by $10,000, which is 15% maximum stocks trading draw down.

Stocks DrawDown is $442.82 (4.40%)

Maximum Stocks DrawDown is $1,499.39 (13.56%)

To learn how to generate the above in stocks trading reports using MT4 stocks trading platform: Generate Stocks Reports on MT4 Guide - Draw Down Stocks Trading Risk Management Chart - DrawDown Stocks Risk Management Calculation

Stocks Trading Money Management

The in stock trading examples illustrated & explained below shows the difference between risking a small percent of your stocks capital compared to risking a higher percent. Good Stocks Risk Management Strategies principles requires you as a trader not to risk more than 2% of your total stocks account equity on any one single stocks trade.

Stocks Trading Percentage Risk Method

2% & 10% Stock Money Management Rule

There's a big difference between risking 2% of your stocks account equity compared to risking 10% of your equity on a single stocks trade.

If you happened to go through a losing stocks trading streak & lost only 20 stock trades in a row, you would have gone from beginning stocks account balance of $50,000 to having only $6,750 left in your stocks account if you risked 10 % on each stocks trade. You would have lost over 87.50% of your stocks account equity.

However, if you risked only 2 % you would have still had $34,055 in your stocks account which is only a 32 % loss of your total stocks account equity. This is why it is best to use the 2% risk management strategy in trading stocks.

The difference between risking 2 % & 10 % on a single stocks trade is that if you risked 2 % you would still have $34,055 in your stocks account after 20 losing trades.

However, if you risked 10 % you would only have $32,805 in your stocks account after only 5 losing stocks trades that is less than what you would have in your stocks account if you risked only 2 % of your stocks account & lost all 20 stocks trade transactions.

The point is you want to setup your Stocks Risk Management Strategies rules so that when you do have a loss making period, you will still have enough in stocks capital to trade next time.

If you lost 87.50% of your in stocks capital you would have to make 640 % profit to get back to break even.

As compared to if you lost 32 % of your in stocks trading capital you would have to make 47% profit to get back to the break-even. To compare it with the stocks trading examples 47 % is much easier to breakeven than 640 % is.

Chart below shows what percent you would have to make so as to get back to break-even if you were to lose a certain percent of your in stocks trading capital.

Concept of Break Even - DrawDown Stocks Risk Management Chart

Stocks Account Equity and Break Even - Stocks Risk Management & Stocks Money Management Methods - DrawDown Stocks Risk Management Chart

At 50% stocks draw-down, one would have to earn 100 % on their invested stocks capital - a feat accomplished by less than 5% of all stocks traders worldwide - just to breakeven on a stocks account with a 50% loss.

At 80% stocks draw down, one must quadruple their stocks equity just to bring it back to its original equity. This is what is known as to "break-even" - which means - get back to your original stocks account balance which you started with.

The more money you lose, the harder it's to make it back to your original stocks account size.

This is why as a trader you should do everything you can to PROTECT your stocks account equity. Do not accept to lose more than 2% of your stocks account equity on any 1 single stocks trade.

Stocks Money Management is about only risking a small percent of your stocks trading capital in each trade so that you can survive your losing streaks & avoid a large draw-down on your stocks trading account.

In trading stocks, traders use stop loss orders which are put in order to minimize stocks trading losses. Controlling risks in stocks trading involves putting a stoploss order after placing an new stocks trading order.

Effective Stocks Trading Risk Management

Effective in stocks trading risk management requires controlling all risks in stock trading & a trader should come up with a money management stock system and a money management in stocks trading plan. To be in stocks trading or any other business you must make decisions involving some risk. All in stocks trading factors should be interpreted to keep risk to a minimum & use the above stocks trading money management tips on this article - DrawDown Stocks Trading Risk Management Chart.

Ask yourself? Some Stocks Tips

1. Can the stocks trading risks to your in stocks trading activities be identified, what forms do they take? & are these clearly understood and planned for in your in stocks trading plan? All the stocks trading risks should be taken care of in your in stocks trading plan.

2. Do you grade the trading risks encountered by you when in stocks trading in a structured way? - Do you've a money management strategy & a in stocks trading plan? have you read about this learn in stocks trading topic which is well covered described here on this learn stocks trading 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 the basis of reliable and timely stocks market information and based on in stocks strategy or not? Have you read about in trading stocks systems on this learn stocks trading web site.

5. Are the stocks trading risks large in relation to trade turnover of your invested stocks capital & what impact could they have on your stocks profits margins and your stocks account margin requirements?

6. Over what time periods do the in stocks trading risks of your in stocks trading activities exist? - Do you hold in stocks trades longterm or shortterm? what type of stocks trader are you?

7. Are the exposures in trading a one off or they are recurring?

8. Do you know about methods in which stocks trading risks can be reduced or hedged & what it would cost in terms of profit if you didn't include these specified measures to reduce potential loss, & what impact would it make to any upside of your stocks trading profit?

9. Have your stocks money management guidelines been adequately addressed, to ensure that you make & keep your in stocks trading profits.

Stocks Risk Management & Stock Money Management Strategies Methods - Draw Down Stocks Risk Management Chart - Draw Down Stocks Risk Management Calculator