Le money trading management is the art of preserving your most precious working tool: its capital. It is the most important element of trading after trader psychology and technical analysis.
Capital is a determining element in any trading strategy, every euro is precious, if you lose 25% of your capital, you must obtain a performance of +33% to compensate for your loss. Lose 50% of your capital, and it is a performance of +100% that you must achieve to get back to the starting point. The more you lose, the harder it is to recover. The key to the war is therefore never to lose money, or to lose very little, and very rarely.
Grace to a set of techniques, money management aims to lose little, little often, and earn more, more often. The trader must therefore cut losses quickly, using Stop orders, and “let the gains slip away”.
In practice, it is a question of protecting oneself against the fact that one has made a mistake about the probable evolution of prices and in the sense in which the trader has any interest in positioning himself, whether this interpretation has been obtained from technical analysis or fundamental analysis or even the fact of protecting himself against an event not foreseen and therefore not taken into account in the price, occurs suddenly.
Money management mainly deals with three factors: the expectation of potential gain offered by the different opportunities and the amount of the position.
Each investment opportunity has a specific technical profile, and therefore an expectation of gain, risk/Reward allows you to choose the position that offers the highest probability of success, in other words, if the potential gain from the position far exceeds the tolerated loss. Let’s take the example of a trader who risks an average of €1,000 for a potential gain of €3,000 and manages his risk correctly. Indeed, it is enough for him to win only in 33% of the cases to achieve a gain of €1,000 (3,000 – 1,000 – 1,000 – 1,000 = 1,000).
The maximum amount at risk as a percentage of total capital
To limit his risk, the trader defines the level of stop-loss, thus ensuring that he only risks a certain percentage of his total capital on each position. Classically, the risk accepted per position corresponds to 2% of the trading capital. In the case of a trading account of €1,000, for example, the maximum loss per position would be €200.