Receiving emailed questions from students is always encouraging. Replying to them keeps me sharp as a trader and instructor. I recently received the following question which I thought would be great to share with everyone.
- Risk management
- Trade management
- Money management
This is an excellent question. Many traders think that those terms are synonymous. They refer to three different, distinct things. Online Trading Academy’s courses teach traders and investors what these terms mean and how they are critical to your market survival.
Risk management is the assessment and controlling of risks in the markets. Risk management involves identifying dangers in taking a particular trade such as location on the curve, location of supply and demand zones, and the trend. Managing risk means that when you eventually take the trade, you have identified the dangers and have only taken the trades that have a high probability for success.
Trade management is the act of managing a trade in process according to the rules you have set in your trading plan. You should have a set of rules that you will act upon while you are in a live trade or investment. These rules should include how you will move a stop or adjust to a trailing stop. It will also include rules for profit taking at your target or how your scale out based on having multiple targets.
Finally, money management is important to your being able to trade long term. If you do not protect your money, you will not have it to trade with. Money management requires you to decide how much capital you will risk on every trade. Risk too much and your losses may pile up and prevent you from being able to trade in the future. Risking too little and you are not maximizing your ability to earn from the markets. There is a right number for each trader and each trade that you must figure out.
This has just been a basic overview and definition of the terms. In our courses at Online Trading Academy, we dive deep into each of these three management areas. Come join us in one of our courses and discover how you can improve your trading and manage your market success.