Money Management Definition
Clear, intuitive, and simple are words you would describe money management, but is it really how it plays out in real life? Saving money, investing money, and putting your money to work all seem pleasant in theory, it is a bit more than that. Budgeting, saving, investing, and spending income that comes from your employer or your business is the process of how money management should flow in an ideal context. Money management is crucial in CFD trading as well. Both fields, in and out of the market, require discipline. Know-how of the fundamentals is instrumental if what you are looking for gain in the long run from this industry. Emotional trading and inexperience are two of the leading causes for why traders lose a lot of money in the long run given the volatile nature of the said industry. Hence, possessing the optimal money management skills is vital to a trader’s success in entering the financial battlefield.
Money Management Tips
- Set a floor amount of money and stick to it
Never gamble with money. Leverage is mostly used with accompanied educated research and risk balancing. Remember that it is the trader’s real money at stake here and not a game like Monopoly.
- Stop-Loss Orders are encouraged to be set per position
Precision is what drives the success of top traders out there, not luck. Having a safety net per trade is always a prudent decision, in the long run, to shield you from random big price moves.
- When profit comes your way, close the deal and enjoy the profits
- Establish your stop-loss orders and take profit orders
Ascertain your level of balance and set your risk/reward ratios accordingly and properly. The ratio for typical beginners is 3:1 [Stop loss and Take profit orders respectively]. For experienced traders, a minimum of 4:1 is what they choose to select but never above 5:1. Again, this boils down to risk tolerance levels.
With money management comes risk management trailing behind. A trader is dealing with real money in this arena so it is vital that this is discussed. Here are some principles that are helpful on a trader’s journey:
- Practice sizing your positions
- Perceive potential risks in the trade at hand
- Evaluate, analyze, and scrutinize the risks
- Come up with solutions to mitigate or eliminate those risks
- Apply the solutions every single time
Risk management, money management, and emotional regulation go hand in hand during your CFD trading journey. If one factor is lacking, the rest skews into a downward spiral causing your trading journey to go sour real fast. Take these concepts to heart and make them happen.