When operating in trading, it is essential to proceed with caution, especially when it comes to managing funds. In practice, trading requires a basic knowledge of the stock market universe, techniques and winning trading strategies.
And to achieve long-term gains, good management of your capital is essential. This is what we call, in the jargon, “money management” or “risk management”. Terms that can be translated as “capital management” or “risk management”.
What is money management?
The principle of money management is quite simple. It’s about managing your trading funds well. It sounds simple at first, but it’s more complicated than we think.
In concrete terms, money management in trading is one of the biggest concerns of many traders and especially novices. Since the main purpose of trading is to achieve a long-term return on capital, it is essential to manage it well.
This point is as important as market analysis, which is useful for better anticipation of the future trend of financial market fluctuations. In other words, it is a matter of adjusting the amount involved on each position with the amount available.
In short, money management consists in defining the amount of money to be used whenever you take a position. Basically, when you leave on a position, do not put more than 5% of your capital. Sites like eToro, a specialist in copy trading in Forex, have webinars but also money management advice.
Some money management techniques
In money management, there are some strategies and among the most common are the TSSF or Trading System Safety Factor, a system developed in relation to averages and not in relation to trading series.
If, therefore, the average of the profits or losses of the previous positions is correct, the amount is reduced or increased accordingly. The SSP allows the management of several circumstances. The principle of this technique is, so to speak, related to mathematics.
The martingale is also one of the best known money management techniques. Its principle is based on the fact that the more you lose, the more risk you take. Thus, the trader focuses mainly on probability.
Having already posted a loss, there is a better chance of obtaining gains on the next trade; the position will then be increased to cover the previous loss: this is the case for the martingale. However, from the experience of some, it appears that this technique is only effective in the short term and is not suitable in the long term.