Money Management

Money management is one of the most important pillars of successful and disciplined trading on the international financial markets. It helps to protect trading capital and avoid large losses – yet it does not always receive the attention it deserves.

Key parameters

When trading with real money, traders should pay particular attention to the following aspects:

• Amount risked per position: how much would be lost if the stop-loss were hit.
• Total risk of all positions: how much would be lost if all open positions were stopped out at the same time.
• Amount invested per position: how much capital – or, in leveraged trading, how much margin – is tied up in a single trade.
• Maximum loss per day or week: a limit after which trading stops for the rest of the period.

These are only some of the parameters to consider.

Example

A widely used rule of thumb is to risk only a small, fixed share of the account on each trade, often 1–2%. With an account of $10,000 and a risk of 1%, a trader risks $100 per trade. If the stop-loss is $2 below the entry price, the position size is 50 shares ($100 ÷ $2). Even ten losing trades in a row would then cost around 10% of the account.

Why it matters for traders

Money management is a major building block of trading and should be tailored to each trader's individual trading style and personality. It is closely related to risk management, and the two terms are often used interchangeably. Together with a favourable risk-reward ratio, consistent money management helps to keep drawdowns within limits.