Draw Down and Maximum Draw Down in Stock Trading
Stocks Risk Management Strategy
In any business, so as to make profit a trader must learn how to manage risks. To make profits in stocks you need to learn about the various stocks trading money management strategies discussed on this learn stocks guide website.
When it comes to online stocks, the risks to be managed are potential losses. Using stocks trading risk management rules will not only protect your stocks account but also make you profitable in 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've lost in your stocks trading account on a single stocks trade transaction.
If you have $10,000 stocks capital & you make a loss in a single stocks trade transaction of $500, then your stocks draw-down is $500 divided by $10,000 which is 5% draw down.
Maximum Draw Down
This is the total amount of money you've lost in your stocks trading account before you start making profitable stock trades. For example if you have $10,000 stocks capital & make 5 consecutive losing stocks trades with a total of $1,500 loss before making 10 winning stock trades with a total of $4,000 profit. Then the stocks trading maximum drawdown is $1,500 divided by $10,000, which is 15% maximum draw down.
DrawDown is $442.82 (4.40%)
Maximum DrawDown is $1,499.39 (13.56 %)
To learn how to generate the above reports using MT4 stocks platform: Generate Stocks Reports on MT4 Guide - Trading With Tools of Stocks Risk Management - Stocks Risk Management Calculator
Stocks Trading Money Management
The example illustrated and explained below shows the difference between risking a small percentage of your stocks trading capital compared to risking a higher percentage. Good Stocks Risk Management Strategy principles requires you as an investor 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% Stocks Trading Money Management Rule - Stocks Risk Management Strategy
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 transaction.
If you happened to go through a losing 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 transaction. You would have lost over 87.5% 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 stocks.
The difference between risking 2% & 10% on a single stocks trade transaction 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 trade transactions 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 Strategy rules so that when you do have a loss making period, you'll still have enough stocks capital to trade next time.
If you lost 87.50% of your stocks capital you would have to make 640% profit to get back to breakeven.
As compared to if you lost 32% of your stocks capital you would have to make 47% profit to get back to breakeven. To compare it with the stocks trading examples 47% is much easier to break-even 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 stocks trading capital.
Concept of Break Even - Trading With Tools of Stocks Trading Risk Management
Stocks Trading Account Equity & Break Even - What are Major Types of Stocks Trading Risks? - Trading With Tools of Stocks Trading Risk Management
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 break-even 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 called to "breakeven" - which means - get back to your original stocks account balance that you deposited.
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 percentage of your stocks capital in each trade transaction so that you can survive your losing streaks and avoid a large draw down on your stocks trading account.
In stock trading, traders use stop loss orders that are put in order to minimize stocks trading losses. Controlling risks in stocks involves putting a stop-loss order after placing an new stocks trade order.
Effective Stocks Trading Risk Management
Effective stocks risk management requires controlling all risks in trading and a trader should create a money management stock system & a money management stocks trading plan. To be in stocks or any other business you must make decisions involving some risk. All stocks factors should be interpreted to keep risk to a minimum & use the above stocks trading money management tips on this article - Trading With Tools of Stocks Trading Risk Management.
Ask yourself? Some Tips
1. Can the risks to your stocks trading investing activities be identified, what forms do they take? and are these clearly understood and planned for? All the stocks trading risks should be taken care of in your stocks plan.
2. Do you grade the trading risks encountered by you when stocks in a structured way? - Do you have a stocks plan? have you read about this learn stocks topic which is thoroughly covered discussed here on this learn stocks web site.
3. Do you know maximum potential trading risk of each exposure for each trade which you place?
4. Are trading decisions made on the basis of reliable and timely market information and based on a stocks strategy or not? Have you read about stocks systems here on this learn stocks trading web site guide courses.
5. Are the stocks trading risks large in relation to the turnover of your invested stocks capital & what impact could they have on your stocks trading profits margins & your stocks account margin requirements?
6. Over what time periods do the trading risks of your stocks activities exist? - Do you hold stocks trade positions 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 enough about the ways in which your stocks 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 stocks trading profit?
9. Have your stocks trading money management guidelines been adequately formulated, to ensure that you make and keep your stocks profits.
