How important is it to make money management in good and correct trading? Is it only focused on profit?
Currently there are still many people who ask about the importance of having a plan, especially those related to personal finances. Not a few doubted the importance of having this planning, but more people have awakened and started thinking or are even starting a process in designing money management.
Wrong planning, wrong choice of investment, and not focused at trading, can actually be fatal. If you don’t believe it, please ask some people who have experienced it. Even when there is a loss, not a few traders immediately improve their trading strategy, even though, many of these losses are caused by messy money management.
In the world of trading, money management has the meaning of the ability to manage finances or manage funds in a trading account. This includes many things, such as how much loss in each trading position, how we know how much risk we face when trading, what our profit target is, and what is the maximum number of trading positions we will open at the same time.
Not only for beginners, professional traders also use good money management methods when they trade. In trading it can indeed provide benefits, but our position will not always be profitable because everyone can experience loss or risk when trading.
Risk management in Money management
When trading it’s very important to anticipate risk of loss, so risk management needs to be taken into account in money management trading as well. What risk management do you need to know for your trading to be successful? Here’s the explanation:
equity can be interpreted as the difference in value between the value of assets and liabilities. Meanwhile, total equity risk is a total financial risk involved in holding equity in a particular investment.
After the trading capital is determined, the trader will determine how much margin is used for trading. Bigger margin, bigger risk. So if you are going to big trade, the risk is also big automatically.
So, you must know the formula for this risk, where the formula is the risk of total equity equal to trading volume divided by trading capital multiplied by 100%. Then, you will see how much the total equity risk of this trade is.
The risk to reward ratio will be accepted when trading. So that in this management a trader must be able to determine the cut loss parameters and profit targets when he enters the market. For example, a trader determines the risk of 1: 3, then when the trader opens a potition at a price of Rp. 100,000,000 and sets a profit target at Rp. 130,000,000, and the cut loss parameter is at Rp. So that if the price is IDR 130,000,000, he will take profit right away, without waiting for the price to rise. And likewise when the price goes down, he will cut loss at the price of Rp. 90,000,000 so it doesn’t continue to fall.
In arranging money management, another important factor is emotional involvement, or trading psychology. It’s because these two factors are interrelated, they will have a negative effect in trading if they are not done properly. Your bad money management arrangement can destroy your trading, also in the psychology of trading that is out of control.
No matter how good the economy is, it can be said that there will be no investment that you can choose that is completely free of risk. So what you need to do is do money management when trading, analyze investment products that are suitable for future goals and look at past performance with the hope that future performance will predict the results.