Money Management

Market Trading - Trading basics
Money Management is focused on managing our investments. To be more precise - the optimal management of our invested money. To invest money is not complicated at all, but to invest them so that we minimize our losses and maximize our profits, is literally an art. And that's exactly what Money Management does.

 

Almost everything that involves the management of our money belongs to Money Management. As the basis of it, however, the following three main areas can be considered:

  1. Stop Loss
  2. Profit Target
  3. Position Sizing

Stop Loss helps us determine the exact amount of money that we can risk on one trade. This amount should be high enough to give the market "space to breath", so it does not terminate our trade too soon, but should also be low enough, in the event the trade would be a lossy one. To find the right balance between these two requirements is a real art of setting the proper Stop Loss. For more information, see the article on Stop Loss.

Profit Target is the opposite side of the coin - an opposite of Stop Loss. While SL is used to avoid losses, while growing to giant proportions, Profit Target hedges profits, while they are high enough. If we miss the moment when our profit is the highest, we risk that a profit turns into a loss, if the market direction changes. To find the appropriate moment to take the profit, is equally difficult, as is the case with SL. If you set it too low, it can be achieved quickly, but an early exit means that we lose the possibility to profit further from the trade. On the other hand, if it is set too high, we risk that it won't ever be reached and the once achieved profit can turn into a loss again. See Profit Target.

Position Sizing is the basis of trading, if we intend to earn more money. Position Sizing helps us determine the appropriate time when we can begin to invest funds on a larger scale. In other words, it determines when to start buying and selling a larger number of contracts, and when to reduce it again. With the increasing number of traded contracts our profits and losses rise as well. For more information, see Positon Sizing.

Here you can find some articles about various types of Stop Loss, Profit Target and Position Sizing.


In the end: The market trading becomes a kind of roulette game, without proper Money Management. We can be right about the future market direction, but if we can't manage our profits and losses properly, our trading system can turn into a lossy one. On the other hand, if we use appropriate Money management, we can still be profitable, even in purely random entries into the trades. So, do not underestimate the strength of good Money Management. It should be as important as determining the appropriate entries into the trades (technical or fundamental analysis).
 

Forex Trading

Advertising