Money Management and Psychology: A Proven Connection

Despite how strange it may seem, Money Management and psychology are closely related, at least from a trading perspective. This connection may appear odd as Money Management is a purely technical discipline, while psychology deals with the emotional sphere. In this article, we will delve into the link between Money Management and psychology, and provide two tips for best integrating these elements.

What is Money Management

Before exploring the connection between Money Management and psychology, it's good to clarify both concepts. The term "Money Management" refers to the set of techniques and actions aimed at ensuring more or less absolute control over one's capital. In most cases, Money Management "boils down" to the practices of determining the right investment. In essence, it answers the question: how much should I invest in this single trade? It may seem like a small matter, but in reality, the hopes of success for the trading activity as a whole revolve around this choice. In short, it's best not to underestimate decisions of this kind. Similarly, one of the purposes of Money Management is to ensure control over potential losses. The basic assumption, albeit far from comforting, consists of the awareness that any trading activity, even the most intelligent and effective, always involves a more or less significant loss of capital. Since the concept of defeat cannot be excluded from speculative investment activities in any way, it's better to come to terms with it and limit the damage where possible. Obviously, limiting losses also means keeping risk in check, somehow controlling it. It's no coincidence, then, that Money Management is inextricably linked to another fundamental discipline for Risk Management. It is precisely the "part" of Money Management that refers to losses that involves aspects that can be considered unquestionably "psychological". We will delve into these dynamics in the next two paragraphs.

The role of psychology in trading

Those who already practice online trading, or any other speculative investment activity, are well aware of the role of psychology, or rather the influence exerted by the psychological sphere. The truth, which for some may appear as the classic open secret, is that trading is a very stressful activity, and constantly puts at stake something dramatically important: one's money. At the same time, the trader operates within a context and exhibits traits of absolute unpredictability, at least in appearance. The market resembles something extremely chaotic, hyper-competitive, difficult to interpret and tame. In light of all these aspects, it's easy to understand the extent of the psychological pressures that the trader must endure every day. It's no coincidence that a cool head is counted among the most important qualities a trader should possess. Unpredictability and the constant awareness of putting one's money at risk put a strain even on experienced traders. The psychological element is simply irremovable. The trader is a human being and, as such, cannot disregard their psychological dimension. Emotions cannot be eliminated, and perhaps it wouldn't even be wise to do so. The only way to "survive" and to engage in effective trading activity is to manage emotions, to manage one's psychological sphere.

What do Money Management and psychology have to do with each other

At this point, it becomes evident how Money Management and psychology are correlated with each other. If it's true that Money Management aims to control losses, and if it's true that the heaviest psychological pressures are caused by the fear of losing money, then Money Management and psychology are closely linked. In essence, Money Management can be not only a tool for managing finances but also a weapon for managing oneself from a psychological point of view. One could say that the more effective the Money Management, the more serene the trading activity. Similarly, it appears evident that the more effective the actions taken to protect assets, the easier it will be for the trader to manage the psychological pressure of the market.

Two "psychological" tips for Money Management

The dynamics underlying the link between Money Management and psychology can be well summarized by two very common approaches, which play a role precisely in managing emotional pressures. The reference is precisely to a particular view regarding the choice of capital to invest and the management of overall capital. This view produces two widely followed rules, which can act as a lever for solving many problems. Here they are. Invest the same amounts. There are numerous methods for identifying the correct investment. Many traders, however, prefer to always invest the same amounts, regardless of the capital actually available and the phase the market is experiencing. There is no real technical reason. The reason for always investing the same amounts is essentially psychological. The human mind, in fact, has evolved to recognize in the "routine" a positive element. After all, what is always scary is what is unknown. Hence, the reassuring impact of the investment always being equal to itself. It should be noted that we are not talking about the most effective method in absolute terms, but rather a method widely used by traders, which could be found, depending on the case, limiting or useful. Withdraw money regularly. This is also a "pure" Money Management maneuver but able at the same time to exert a certain effect from a psychological point of view. In fact, one of the biggest sources of distraction for a trader is the available capital. Very often, the trader looks with a compulsive approach at the capital they possess at that moment. What they see, in some way, influences them when developing the trade. However, the overall capital is only one of many elements that must be taken into consideration. The advice, in this case, is to withdraw regularly so that the capital is always of the same amount. Traders who adopt this practice withdraw once a week. Finding themselves always with the same capital, far from restoring a sense of immobility, expresses a certain idea of stability and constancy, elements that by nature are lacking in the market but which the trader desperately needs.