What is money management in trading?

Money management or the science of risk management is a method that helps traders control and optimize the risk exposure of their accounts. In a field such as trading, money management plays an important role in managing money.

The rules of good money management in trading

When trading is involved, you should know that the risks must be calculated. In order to learn more freely, click here to lear money management. In addition, to be successful in the long run you need to know that the trader needs to monitor his risk exposure so that it is high enough for an attractive return on investment without putting him at risk. This is where money management comes in which is just maximizing gains and minimizing losses. It optimizes the risk/return ratio of a trading account while taking into account the trader's investor profile. Furthermore, it is important to understand that most traders who do it on their own easily notice a big loss which results in a high recovery.

Risk management involves four steps

One of the first aspects that the trader must define is the level of risk that he can tolerate. In order to know this, he must first know his stop loss, which is the level at which he cuts off the trade. By placing a stop loss order, the trader can control the maximum loss to which he wishes to expose himself upon entry. Secondly, the Value at Risk or the "value of risk" which estimates the maximum loss exposure. It is based on the confidence level, the time horizon and the distribution of returns. In addition, the presence of two indicators for optimizing your ratio or return. The focus on loss control is not the main objective to be mastered but rather the attractive performance to be achieved. It is calculated as the difference between the yield and the risk-free rate. Furthermore, dividing this net return by the number of risk units gives a more accurate result of its loss calculation.