Money management
Family III · Risk
Not to be confused with position sizing, risk reward ratio, stop loss.
Money management is the set of rules that determines how much capital is committed to each position and how much of the account is exposed at any one time. It operates on the account level rather than the individual trade level, and it is distinct from the analysis used to choose trades. The objective is survival: keeping drawdowns small enough that a normal losing streak does not end the account.
Core components
Money management is usually expressed as a small number of numeric rules:
- Risk per trade — the maximum loss accepted on a single position, commonly set as a percentage of account equity. The figure varies by trader, strategy and regulator, and is a personal or firm-level choice rather than a universal standard.
- Position size — the quantity of the instrument, derived from the risk per trade and the distance to the stop.
- Total exposure — the sum of open risk across all positions, including correlated ones.
- Drawdown limit — the loss level at which trading is reduced or halted.
These rules are applied before entry, not adjusted after a loss.
Worked example
An account holds 50,000 in equity. The trader risks 1% per trade and buys a stock at 40.00 with a stop at 38.00, a risk of 2.00 per share.
If the stop is hit, the loss is 500, or 1% of equity. A second position in a correlated stock would add to the same risk budget.
Relationship to risk of ruin
Smaller risk per trade lengthens the losing streak an account can absorb before equity is exhausted. Because returns compound on a shrinking base, a large drawdown requires a disproportionately larger gain to recover: a 50% loss needs a 100% gain to return to the starting level. Money management rules limit how far that process can run.
Often confused with
- position sizing
- Position sizing is the process of determining how many units, shares, or contracts to commit to a single trade, based on account equity, the distance to the protective stop, and the maximum acceptable loss per trade.
- risk reward ratio
- The risk-reward ratio is a comparison of the amount of capital risked on a trade to the amount of profit targeted, expressed as a quotient or a ratio such as 1:2.
- stop loss
- A stop loss is a resting instruction to close a position once the market reaches a specified trigger price, intended to cap the loss on that position.