Money management and risk management are a very important part of trading. In order to be a successful trader, you need to master the three most important parts (technical analysis, psychology and money management). But what do you actually imagine under that?
Money management and risk management for everyone
It may be an unknown or relatively difficult concept to imagine, but in reality it is very simple. Money management represents certain rules by which we manage our finances in trading. How much money (or% of your portfolio) do you put into each trade. How much will you start trading with. And many other issues related to the finances you trade and how you use them.
Risk management, on the other hand, talks about how to set the Stop Loss. Do you want to take a risk with a very narrow Stop Loss to have the highest possible RRR (risk to reward ratio), or would you rather get a bigger Stop Loss? With risk management, it is undoubtedly true that you have to enter a Stop Loss for each trade and exactly according to your strategy. It is a strong discipline that can be very demanding on emotions, but in many cases it can save you and therefore you have to “act like a machine” and follow a given strategy.
What is RRR and how to use it?
Risk to reward ratio is often a tool to help you determine the value of what you risk versus the value of what you can earn in a given trade. RRR 1: 1 tells you that in order to get one unit (dollar, BTC, satoshi), you risk one unit (dollar, satoshi, BTC).
On the Tradingview page you can find this tool called Long position or Short position. When using the given tool, you will see the ratio (RRR), which will tell you how you are doing in the given trade with your target and Stop Loss.
In order to find out what RRR is right for you, you need to know what type of trader you want to be. In each case, the ratios and the RRR are different. When scalping, 1: 1 to 1.5: 1 is recommended (but scalping is not recommended for beginners). For daily trading, you should have an RRR of at least 2: 1. In short-term trading, the RRR should be between 3: 1 and 5: 1 and in swing trading it should be at least higher than 5: 1.
Two rules that can change your trading
In money management, it is necessary to know how much and in what business you want to put and how much you are willing to take risks. It is generally recommended to invest max. 10% of your portfolio in one trade. That means a maximum of 10 open trades (but it doesn’t need to be strengthened!). Also in each trade it is necessary to have a Stop Loss set, which should not exceed more than 10% (which means that you risk 1% of your entire capital).
The second piece of advice is: before you want to start trading, take a retrospective test of your strategy, money and risk management. It is not a bad idea at all to try to have the same RRR. This can best show you what results your strategy really brings.
Conclusion on money management
Proper money management and risk management may seem very simple at first, but believe me, it’s quite challenging – especially on the psyche of the trader. It is good to realize that these are the small details that can ultimately make a significant difference between profitable and loss-making traders.