Risk Management and money management are not the same

Today I want to talk about risk management and money management

Many confuse risk management with money management and think both are the same. I don't blame them for confusing both as both limit the position size. But risk managment is more than position sizing. And money management cannot be reduced to position sizing either. Both are an integral part of trading and complement each other. Let me try to demonstrate this.

Before we take a trade, we need to identify the risk that is involved with the trade. That is a must. Only after evaluating the risk and upon deciding in favour of the trade, next we decide, based on our risk and money mangement rules, how big the position size should be. This last sentance demonstrates that risk- and money management can not be seperated.

While my risk management rule may suggest the trade is good to take, my money management may disagree. One of the reasons may be that I already have open positions and the max amount for open positions is already reached.

Or my risk management is not in favour of the trade, even though my money management rule would allow me to take the trade. The risk involved with this new trade may be within my risk and money management parameters (the stop placements allows the trade). And I have more than enough free margin. However, I already have an open positon with the same asset. Or I have an open position that is correlated with this asset. The correlation may be positive or negative, it increases the risk this way or the other. One translates to increasing the risk on the asset, the other means taking a trade counter the open position. Both result in increased risk, which my risk management rule does not allow.

Risk- and money management are mostly considered at the beginning of a trade (risk- and money management are mostly considered for entires). But risk- and money management are important throughout the lifespan of a trade. An open trade is always a risk. The risk is only eliminated upon closing the trade. Some may agrue that we have stops. True! Stops are there to protect us. But there still is slippage. Without really knowing when and where to get out, our trades are vulnerable. Getting out of a trade also involves risk- and moneymangement. Ideally we get a multiple of the initial risk back from our trades. One of our exit management may be to take partial profits at 2r or close the whole trade at 3r, because experience shows that the asset tends to move back once the trade yielded 3r. I am sure many of us have made the experience that as soon you have 200 or 300 pips profit, the market makes a reversal. You possibly would have been alble to squeeze more out, but by rule of thumb anytime your trades reaches 300 pips profit there is a reversal. So you may use this information and have hard take profit at 300 pips profit.

As you can see, risk management and money management are more than just words. While both complemet each other, they are not the same.

Thank you for reading. If you have anything to add or any questions please leave them in the comments section below.

Happy trading,
TT