How important is Money Management in Trading?
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How important is Money Management in Trading?

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How important is Money Management in Trading?

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How important is it to arrange money management in excellent and correct trading? Is it only focused on profit?

Currently, many still ask about the importance of having a plan, especially those related to personal finance. Not a few doubt the importance of having this plan, but many more have awakened and started thinking or even beginning a process of designing money management.

Wrong planning and wrong choice of investment, as well as actual trading, can turn out to be fatal. If you don’t believe me, please ask some people who have experienced it. Even when a loss occurs, 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 means the ability to manage finances or manage funds in a trading account. This includes many things, such as how much loss is in each trading position, how we know how much risk we face when trading, what is our profit target, and what is the maximum number of trading positions that we will open at the same time.

Not only beginners but professional traders continue to use suitable money management methods when they trade. In trading, it can provide profits, but not consistently. Our position will profit because all can experience loss or risk when trading.

Risk management in Money management

It is essential to anticipate the risk of loss, so risk management should also be considered in money management trading. What risk management do you need to know for your trading to succeed? Here’s the description:

Total equity risk

Equity can be interpreted as the difference in value between the value of assets and liabilities. Meanwhile, total equity risk is the financial risk involved in holding equity in a particular investment.

After the trading capital is determined, the trader will determine how much margin to use for trading. The bigger the margin, the bigger the risk. So, for example, if you are going to trade big, the risk is automatically significant.

For that, you must know the formula for this risk, where the procedure is the total equity risk is equal to trading volume divided by trading capital multiplied by 100%. Later it will be seen how much the full equity risk of the trade will be.

Risk to reward ratio; namely, the ratio used to compare the potential profit and risk of loss.

The risk-to-reward ratio will be accepted at the time of trading. So in this management, a trader must be able to determine cut loss parameters and profit targets when he enters the market. For example, a trader determines the risk is 1:3, then when the trader opens a position for Rp. 100,000,000 and sets a profit target for Rp. 130,000,000, and the cutloss parameter is for Rp. 90,000,000. So if the price is IDR 130,000,000, he will profit immediately, without waiting for the price to rise. And also, when the price goes down, he will cut loss at Rp 90,000,000 so it doesn’t go down.

Another equally important factor in compiling money management when trading is the involvement of emotions or trading psychology. This is because these two factors are interrelated. After all, they will harm trading if not done correctly. Your poor money management can destroy your trading and your uncontrolled trading psychology.

You are planning for money management when trading can reduce the risk of loss and even become a tool to avoid total losses. Master this plan to get consistent profit in the long term.

In any good economic conditions, it can say that there will not be a single investment that you can choose that is entirely free of risk. So you need to do money management when trading, analyze investment products suitable for future goals and look at past performance with the hope that future performance will be predictable.

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