Money Management Strategies for Serious Traders

Money management is a very broad discipline that allows the trader to have full control - or close to it - of their capital and the risks they are exposed to during ordinary trading activities. Therefore, its importance is evident in a context that is particularly competitive and fraught with dangers. All traders, both experienced and less experienced, are required to adopt money management strategies. The difference simply lies in the complexity of these techniques. Here is a quick overview of the most common techniques. Stop loss positioning. The term stop loss refers to the price level, identified by the trader, at which a losing position is automatically closed when reached. It is one of the most basic money management techniques, but it is also one of the most important. Its purpose, in fact, is to contain losses and prevent a difficult situation from turning into a catastrophe. Generally, the stop loss corresponds to a price level beyond which an immediate trend reversal is considered impossible. Along the same lines, there is the take profit, which, however, aims to prevent a profitable position from turning into a losing situation. Position sizing using the Kelly formula. Position sizing is the branch of money management that allows the trader to precisely define how much money to invest in a single trade. As a general rule, it is best to follow the Kelly formula, according to which the value obtained from the formula must always be greater than 0. The formula is as follows: (average win * probability) - (average loss * probability) It is obvious that to put this formula into practice, it is necessary to have a large statistical sample available in order to accurately define all the factors involved (average win, average loss, probability of winning, probability of losing). Position sizing using Williams' formula. This formula involves the concept of Drawdown, which is the reduction of capital following a loss expressed as a percentage of the accumulated capital. The formula is as follows: Investment = (capital x risk %) / Maximum drawdown in the reference period. It should be specified that the "risk %" factor is subjective and indicates the trader's average degree of tolerance.