What is money management?
Many traders believe that the most important thing in trading is the knowledge of everything related to the market analysis or having a trading system with high reliability. It is true that these aspects are part of the success of a trader, but are only one part. However, one of the most important aspects of trading refers to the risk control and money management, because if we enter the market without a contingency plan for the worst case scenario, we are betting, not trading. We can spend much effort improving our trading system and gain knowledge about the market, but unless we develop a money management strategy we will not survive long in an environment as unpredictable as the market.
Money Management or Operational Risk Management is defined as the process of analyzing the trades according to risk and potential profits, determining how much risk, if any, is acceptable, and managing each position to control risk and maximize profit according to the equity in the trading account. Following the principles of preservation of capital, money management may consist of anything from a few simple rules to complex portfolio management theories. However, for most traders and investors, a common sense approach is more than enough to start earning money.
In this section I hope, for a moment, we will divert your attention from the search for the perfect system, so you can discover that you can turn a loser system into a winner just by changing the rules of money management.
