Money management strategies

29 мая 2022 г.

When developing your own trading strategy, you can’t ignore such a question as a money management strategy. You should start working only after deciding on the budget - its size, acceptable risks and money management rules.



The main rule: the risk of any transaction cannot exceed 1-2% of the capital. That is, if you have, for example, $25,000, it is permissible to lose no more than $250-500 on one position. Leading traders are usually limited to 1%.

This money management strategy is a priority when making decisions about entering or exiting a position. If the probable loss exceeds the level determined by the trader, then the transaction should be abandoned. As the balance increases, both risk and reward will increase. And vice versa. With a decrease in balance, these indicators will decrease accordingly.

However, no matter how trading develops, the established percentage of risk cannot be changed without a reason.

The larger the trader's balance, the smaller percentage he prefers to use. With a million dollars in your account, it is not very justified to invest $10,000 in each trade. This is why high rollers prefer to define risk as a fixed amount rather than a percentage.

In addition to the risk limit discussed above, money management strategies often include other limits.

For example, it could be setting a loss limit for a trading session.

The presence of such a barrier will allow you to "jump" in time if the indicated period of trading is not very successful.

A fairly common technique is to limit the loss of a profit share.

Trading stops immediately after a certain part of the money earned during the session is lost. Thus, the trader protects his profitable day from too minor completion.

Trading on multiple positions

Opening several positions at the same time is a fairly common phenomenon for most traders. The capital management strategy provides for the mandatory regulation of such trading. The presence of a scenario of behavior when opening several positions at once will greatly simplify trading and save valuable time

To formulate recommendations for each specific situation, of course, is unrealistic. However, some general provisions can always be formulated. For example, if there is a correlation, it is permissible to open two positions, setting a risk of 1% for each, but at the same time one should refuse transactions involving third assets, with which this pair also has a stable relationship.

As for determining the percentage, here experts recommend using the same 1% of the total balance, regardless of the number of positions. This amount of risk rarely allows you to open more than five transactions at the same time when it comes to stock trading. In the case of futures, currency pairs and options, their number may be higher.

It is worth calculating 1% of the initial balance even if there are already open positions. Active trades change the size of the deposit, so 1% will not be a static value.

Let's look at an example of a fairly standard trade.

Let's say you start out with a starting capital of $25,000. The maximum risk in this case is $250(1%). When you analyze the market, you find crypto priced at $20 that match the entry rules you defined.

Let's say the stop loss for this position should be fixed at $17. To make sure that the risk is justified, the profit potential should be assessed. If your target is $26, then you risk $3, while the profit in case of successful completion of the transaction will be $6 per share.

Thus, we have a ratio of 2 to 1.

It's easy to calculate how many coins you can buy to meet your risk tolerance of $250. In this particular case, 83 shares could be purchased for a total of $1,660. With a stop loss of $17, the risk is $250, not counting commissions. If exiting a position upon reaching the target profit is used, immediately set a take profit.

These are the simplest money management rules, but by using them you can improve the profitability of your trading strategy and limit yourself from unwanted losses. We wish you successful trading on the markets!