What is money management?
Money management is the way to organize the investments in order to limit risks while attaining the highest growth feasible from the trading account. There are several methods of executing money management, some methods that are considered good and others less; anyway a right method should be focused on the risk and reward factors of your account and enable investors to trade using leverage and at the same time managing your risk. Risk Management aims to ensure your account gives off a good performance during a trade, without having to lose too many funds.
In this article, we’ll be looking at the different types of investment strategies that traders may use.
Conservative Money Management
Conservative investing involves the conservation of equity over market returns. It is the protection of a trader’s investment by investing in trades with lower risk, money market trades and fixed income, and also large-cap equities or blue-chip.
Understanding conservative investing
The risk tolerance of conservative traders ranges from low to moderate. A conservative investment relatively has a low amount of risk involved. Although this investment strategy will protect against inflation, a lot of profit cannot be generated from it over time; unlike the other risky investments.
Speculative investment involves investing in the financial market with a high likelihood of the investment having zero profits. Speculating promises huge unreasonable returns from trades that can either move in favor or against the trader. Speculating might be compared to gambling but it’s not precisely the same thing even if the risk level involved in a speculating investment is above average. Speculators open positions with the knowledge that the position will be kept open for a short period before selling.
High risk Money Management
A high-risk investment involves an investment that requires a high amount of risk. The risk of an investor losing all his capital is high. The probability of the investment underperforming is normally higher than usual. Only an investor with a high-risk appetite ventures into it.
Example of high-risk investments
Example 1 – Hedge Funds
This is an investment strategy that involves the combination of funds from investors like institutional investors to invest it in different types of assets and it is supervised by a professional investment administration firm.
Example 2 – Private Company Investments
This is the method by which private companies generate money from investors. Nothing is guaranteed, the profits promised by these companies are not certain, and hence very risky. Investors should only invest what they can bear to lose.
Risk tips for your money management
Before venturing into CFD or Forex trading, you need to understand that you’re going to run into some risky conditions. Therefore it is good to observe a good money management strategy and also learn all the required notions in Risk Management.
Even though most of these risks are inevitable, here are some ways in how to manage them.
- Choose an appropriate and good trading platform
- Don’t be too greedy, only trade with the amount you’re willing to lose.
- Carefully monitor your trades, and take note of all the market movements.
- Use technical, sentimental, and fundamental analysis to analyze your trades.
- Employ the use of technical indicators to help identify price trends and price actions.
- Employ the use of position sizing
- Identify your trading risks
- Evaluate and analyze those risks
- Come up with solutions to lessen those risks
- Apply and regulate those solutions regularly.
Risk and reward ratios using stop loss
Before going into a trade, make sure to register with a good, regulated and reliable trading platform. Trading with an adequate approach to money management is about choosing a right risk management method to follow and also the way of implementing limit orders in your investments.
There two types of limit orders namely:
- Stop loss
- Take profits
This is the act of limiting loss when a trade keeps going against the trader position. Setting a stop-loss order is like setting a particular amount as the maximum loss a trader is willing to deal with. When a trade hits its stop loss value, the trade will be immediately closed at the current market price to prevent any more loss.
This limit order has more advantages than that of stop-loss orders. It is an order set to close a trade when it hits its targeted profits. It helps a trader to set a particular amount of profit he wants to generate from the trade.