MONEY MANAGEMENT

Money managment, two words to define a wide subject . It includes a lot of fields as the diversification, appropriate distribution of the money in our "portfolio" or group of investments, handling of the risk, etc...

Basically Money Management is a technique that indicates to us how much money we can lose at the most in each position or day, how many contracts we should initiate a position with , when we must close our position, which hour range are better for trading, etc etc.etc..

The easiest way to get the system losses under control is using a simple stop loss, whose function is obviously not to lose more than a certain amount of our money when we invest. This seems easy, but doing some study we see that a stop too tight can reduce reliability to our system , on the other hand, a stop too loose can take us to ruin . Stop loss is something that must be well adjusted for each system. Our portfolio of systems control the losses not surpassing every day a small percentage with respect to the invested capital, unless uncontrollable movements in the price take place.

We also establish techniques to protect the benefits, by means of progressive exits when certain levels are reached, trailing stops that will make us leave the position when we reach some benefits and we lose a percentage of them, etc. All these strategies will be shown in trading techniques.

The way to determine the amount to invest in an operation is also very extensive, from positions whose size depends on the force of the tendency (the smaller tendency , the greater the position, since a slight tendency assumes that a strong one is expected to come) till algorithms that quantify the amount based on the volatility of the market . Also, the size can be determined by simple statistical studies and probability, but taking care with not entering in sobreoptimization (excess of fitting to the market), subject which we will deal with in another article .