The Pillars of Trading in Modern Markets – Part 3: Money Management, August 20, 2014

Good Morning traders,

Today I continue my mini-series of 5 articles with a new article. I will complete this series on Friday.

Every day I publish a brief article. The focus of the series is on the “Pillars of Trading in Modern Markets”.

In Yesterday’s post I have written about Risk Management.

20140819_money_managementToday’s topic is very, very important. Is there a way to reach our objectives in trading?

Yes, there is and that happens through Money Management. When I mention objectives I mean profits levels and return rates generated by our trading activity. Now could there be anything more interesting than this?

So let’s have first a clear definition of Money Management in place, and look at what exactly is it about. Money management is the discipline and practice that allows managing the position in order to optimize risk management and magnify returns.

You can become very creative with Money Management. I have studied it in-depth and even wrote a research paper during my Master Thesis in Finance, and that helped in filling a gap in academic research in Finance.

It is possible to “play” with Money Management techniques and generate hundreds of different ways to calculate position sizing, entering partial positions at multiple price levels and taking partial profits at a different levels too. It is also possible to take a money management technique and literally “superimpose” it on top of any trading method, although within certain limitations and boundaries.

Money Management is really the way you can reach your objectives in trading, provided that:

  • they are realistic and supported by a quality trading system
  • your risk appetite is within reason
  • you use proper money management techniques
  • you get aggressive with other people’s money, i.e. the gains you extract from the markets

Note: I never risk more than 1%, even if I use trading methods and entry that have a 90% reliability rate (Oh yes! Such methods do exist: take a look at the FibStalker Trading Method coupled with the unique FibStalking Timing Technique, which allows procedural testing of areas of support and resistance).
It is possible to “supercharge” profits keeping the risk low on your own capital, which also serves keeping in “check” your emotional capital (which depletes at a faster rate than your financial capital).

Risk and Money Management are closely related. They help and serve each other; each one helping the other in reaching their full potential and objectives. So position sizing and money management help reducing risks, especially when you enter a trade in legs, drilling down into the smaller time frames; Risk Management contributes to reaching trading objectives, mainly reducing the exposure of your hard-earned capital, to the maniacally-depressive psychosis of Mr. Market (always remember PPC, #1 rule.)

I have talked about Money Management in my last Webinar on which can be watched here:

See you tomorrow with the next topic.

Till then stay tuned. My topic for tomorrow will be the interesting Psychology of the Markets.

Have a great day.

Giuseppe, ~FibStalker

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Filed under Articles, Education, English language, Money Management

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