Money management

When Money Management is defined as a hedging strategy which aims to raise the risk of a securities portfolio to be controlled by sizing the individual trading positions.

Example: A stock market investor manages a securities account with a volume of 1 million euros. In order to limit the risk of loss of the individual positions, he limits their size to 50,000 euros each and thus distributes the capital across at least twenty different positions. If a position exceeds this specified limit due to a price increase, it is partially sold in order to be within the limit again.

The position sizes can also be determined depending on their individual risk. A smaller position size is then chosen for risky securities than for less risky ones. This corresponds to the definition of a maximum, absolute (amount) risk of loss per position.

Depending on the trading strategy , the risk of loss per position can be limited by defining a stop-loss order, which in turn can be based on technical chart features or the volatility of the security. For example, if a security fluctuates very strongly, the stop-loss threshold must be chosen more generously and the position size reduced, taking into account the maximum absolute risk of loss per position. Thus, risk control for each security position is also an aspect of money management.

Another common money management strategy is maintaining a certain liquidity reserve .

Most professional investors and traders use money management strategies, which is what sets them apart from speculators .