Money Management

Money Management

Money Management is a set of rules and specific techniques, simultaneously oriented to the risk minimization and profit maximization.

Risk is a maximal amount of assets, which will be lost until a decision about closing of an unprofitable position will be made. In such way, the risk is a difference between opening price of a position and price of the stop-loss order or overturn of the position multiplied the deal’s volume.

The main principles of the money management:

1. The total amount of the invested money should not exceed 2 % of the total capital. This principle prescribes a rule about calculation of margin for open positions: the sum of the obligatory reserve for usage in non-standard situations and continuation of the normal work must be no less than the half of the capital.

50% is a value brought by Murphy; however, a lot of analysts think that the much less percent of invested assets must be 5% - 30%

2. The total amount of assets, invested to the only one market, can not be more than 10% - 15% of the total capital. In this case the trader is secured from investment of the extra assets to the one deal, which can lead to the downfall.

3. The risk rate for each market should not exceed 5% of the total capital invested by trader. In such way if the deal turns out be unprofitable, then the trader is ready to lose no more than 5% of the total assets sum. 5% is a value brought by Murphy, however, for example, Elder gives a value 1,5% - 2%.

4. The total sum of the guarantee fees, depositing at position opening at one market group, should be no more than 20% - 25% of the total capital. The markets, which compose one group, move more or less similar. Working at Forex four major markets can be determined, inside of which the movement of the currency rates is almost the same: the dollar area, the sterling area, the yen area and the euro area.

5. Degree determination of the portfolio diversification.

Diversification is one of the ways to secure a capital; for all that the variety must have limits. It is always needed the sensible compromise between diversification and concentration. You can more or less securely distribute assets by opening positions at the same time at 4 or 6 markets of the different groups – but no more. The larger importance of the negative correlation, existing between markets, the higher is diversification of the invested assets.


6. Determination of the stop-loss levels. The value of the stop-loss, at first, depends on how much trader is ready to lose at one deal, and, secondly, depends on traders’ assessment of the situation at market. Suppose that trader has the dollar deposit in amount of S. At the position’s opening trader concedes the losses in amount of L% of the deposit sum.

Suppose the contract for 100 000 was opened by the buying of the USD against the Swiss franc (CHF), with that the cost of the opening was p1. Buy USD 100 000; Sell CHF p1 x 100 000. At what p2 level trader has to set the selling order, for the purpose not to exceed the level of the allowable losses SxL?

If your order at p2 level has worked out, then the loss of the position would be: Loss – CHF (p1 – p2) x 100 000. On the other hand the loss should not exceed the USD SxL, or in the Swiss franc (CHF) SxLxp2. Consequently, we have: (p1-p2)x100,000 SxLxp2, there we have the following formula for the order’s level: p2 p1-p1 xSxL (SxL+100,000).

It should be noted that at determination of the stop-order it is needed for trader to rely upon the reasonable combination of the technical factors, displayed at the price chart, and own considerations concerning secure of funds. More changeable market, more removed should be the stop-loss levels from the current price level.

It is a trader’s benefit to set a stop-loss. At the same moment the extra “hard” stop-orders can lead to the undesirable position closing at the short-term price fluctuations (“noises”). Very remote stop-orders are not “noises”-sensible, but can lead to significant losses.

7. The determination of the ratio between potential profit and losses. For each potential deal the profit rate is determined. Such rate should be well-balanced with potential loss in case the market is going in undesirable direction. Usually such ratio is settled as 3 to 1. Otherwise, you should to refuse the entrance to the market. For example, if a trader supposes that margin will be $100, then the potential use should be $300.

Because the comparatively small number of deals during the year can make a considerable profit, it is necessary to try to maximize the profit, remaining the profitable positions as long as possible. Otherwise, it is needed to minimize the losses at bad deals.

8. The trading with several positions. Entering the market with several contracts (i.e. trend positions are executed with rather liberal stop-orders, which allow keeping safe these positions in the conditions of consolidation and prices correction. These positions give trader a possibility to make a greater profit. The trading positions are meant for the short-term trading and are limited by the strict stop-orders. In this case at the achievement of the certain price guideposts they are closed, and at the tendency’s resumption are recovered).

9. Conservative and aggressive trading approaches. The most part of analysts prefer the conservative approach. For example, Teweles J. Richard, Charles V. Harlow and Herbert L. Stone in their book “The Commodity Futures Game” wrote: “… Murphy is held to the same opinion: “…The trader is gambling aggressively when strives to make money promptly. The profits are significant, but only at time when market is moving fast in the favorable direction. When the state of the market is changing, the aggressive strategy as a rule is leading to the failure”.

10. Rules of the position opening:
a) open the positions only at the presence of the one major and at least one additional signal;
b) at the opening, by all means, form and write down: the price at the entrance the market; the price at which you will close the profitable position; the price at which you will close the loss-making position and the estimated time of the position’s closing.


11. Support rules for position and partial closing till the estimated time:
a) support the positions only in case if the analysis confirms the conclusion made earlier;
b) partly close positions: at receiving losses above supposed; if the price achieved the supposed rate for profit making; c) wait: at receiving losses below supposed; if the price is at the same level; if the price did not achieve the supposed rate for the profit making.


12. Rules for position closing: - after the expiry of an estimated time; - at the receiving of the supposed profit; - at the receiving of the supposed losses; - at the achievement of the profit’s maximum.


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