The essential tools for effective money management

To succeed in the world of trading, you need to have a good knowledge of the markets and the ability to analyze them. But you also need to be disciplined and organized, especially in terms of risk management and protecting your capital from losses. This method is called money management and there are several tools specifically adapted to this risk management and that we will present here in more detail.  

72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. This is an advert for trading CFDs on Plus500
The essential tools for effective money management

Reminder about money management :

First of all, let's take a few moments to recall what money management is and what it consists of. Money management means "money management" in French and is a term specific to the world of finance and more particularly to the world of online trading. It actually refers to the management of risks related to investments made. Thus, a good money management will allow you to manage your earnings and your investment in an efficient way in order to avoid taking risks that would be outside the scope of your trading strategy.

Money management is therefore essential to any trading activity and many investors lose their capital because they have neglected this aspect of the business and have not implemented a money management strategy. On the other hand, if you immediately implement a trading strategy that includes money management, you will be more likely to follow your strategy to the letter and reduce your exposure and the risk of losing your capital.

This is why we will explain to you, through this detailed article, how to set up an effective money management by helping you with the various tools at your disposal to follow this strategy. By combining an established and stable investment strategy and a strict and realistic money management, you will have every chance to implement a wise strategy and avoid seeing your capital melt away too quickly and end your adventure in online trading.

 

The demo account: A little known money management tool.

If you want to trade a stock or a type of stock for the first time on an online trading platform, the demo account can be a tool to use to train yourself in money management. Once you have acquired all the necessary knowledge about the chosen stock, you can use this type of account to try out the practice without risking your money and to develop your investment strategies without stress. This is also true for money management because the demo account will help you understand if your strategy is effective or not on this asset.

The free demo account is offered by most online brokers and consists in allowing you to trade in real market conditions but with a fictitious capital. Thus, you can test your strategies and continue to learn without taking any risk with your capital. You can then, when you feel ready, switch to real mode and make real investments.

 

Money management software applied to trading:

Of course, there are also tools specifically designed to help you with your money management that are made available by online trading platforms. These tools or money management software allow you to better manage your risk and your exposure to the market.

Among the most recognized and effective money management software are those of the Metatrader Supreme Edition platform including Expert Advisors such as the Mini Terminal and Trade Terminal. These tools allow you to place pending orders, to have OCO and OCA orders, to save order templates, to close trading orders instantly, to create trading alerts, to make lists of stock market orders, to make partial closures of your positions according to a predefined profit and money management objective or to close your orders automatically.

 

The risk calculator: An increasingly popular money management tool.

Another undeniably effective tool for protecting your capital is the risk calculator. This tool will allow you to know how much you are risking for each of your positions and therefore calculate the maximum loss of this position. This way, you will know instantly if your chances of success are worth taking the maximum risk displayed and can therefore decide whether or not to continue taking your position.

Trading calculators allow you to know in advance how much you can win and how much you can lose on a position. This tool will also provide you with other useful information such as position size, lot, spread, swap and other parameters. It will also allow you to determine the margin needed to maintain your position.

 

Create a money management tool on Excel :

If, as we have just seen, there are tools specifically designed to assist you in your money management, you can also choose to design this tool yourself using a simple Excel file.

This software will indeed do the same job as a trading calculator once you have set up and automated some calculations. But this file also has other advantages. You will be able to record the results of each of your trades and analyze them later to find out what mistakes you made and which strategies are the most reliable.

Just like a trading journal, such a spreadsheet should be an essential tool for the trader and will allow you to easily find an old position in order to learn from it and use your experience to improve your money management.

 

The golden rule of money management:

Also remember here that the golden rule of money management is to never invest in trading money that you might need and never bet everything on a single position but, on the contrary, seek to diversify your trades.

Frequently Asked Questions

What is good money management?

Good money management is risk management that allows you to limit the losses of your capital but also helps you to improve your gains and therefore the overall profitability of your portfolio. If your gains are greater than your losses, your money management is effective. It is not if your losses are greater than your profits and therefore if your capital is in danger.

Can you entrust your money management to a professional?

Some online trading platforms allow you to entrust your money management to a third party, usually a professional account manager. The account manager will use his or her experience of the markets to balance your portfolio and positions in order to minimise the risk of loss and improve your chances of making a profit. Of course, this service often comes at a cost that you should consider.

Who is money management for?

One might be tempted to think that money management is a method that only concerns novice traders, but it is not. In fact, risk management in the world of trading is for all investors regardless of their level of experience and even the most experienced investors need to apply it to every position they take.

72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. This is an advert for trading CFDs on Plus500