Under Money Management (MM), the correct classification and investment of your own money is considered. It is often not just the appropriate and necessary strategy to think about. Rather, the successful traders have come to success due to their MM strategy. Mostly not the big fund or investment is made, which is put on a single share. Rather, the right division of capital must be considered to deal wisely with losses. A good money management strategy deals well with individual losses. The loss is limited in order to have enough capital after numerous failed attempts to carry out further experiments. This type of action also gives rise to risk management. Basically, every dealer has the goal to increase his money. However, this is only possible if the losses are compared to the profit. The goal of MM is maximizing profits and minimizing losses. Of course, the two sides influence each other, which means, however, that a smart need for action exists. To pursue a good money management strategy entails a higher total income.
As mentioned before, there are different strategies to start with money management. There are three types of capital management, which are worth mentioning:
- Core Equity Method
- Total Equity Method
- Adaptive Core Equity Method
In the first method, the Core Equity Method, it is an approach that assigns an amount to each position opened that is subtracted from the total fund balance. If a balance of 100,000 euros is available, only 5,000 euros should be added to a selected position. This means that 95,000 euros would be available for other positions. If another position is to be opened, a capital allocation of 3,000 euros can be made. This amount must be deducted from the capital in order to use a remaining amount of 92,000 euros. This core capital method, also known as net balance, is widely used in the market.
In this type of variant, the Total Capital Method, all available capital is added to the speculative capital. Everything is lumped together, including profits and losses. With a starting capital of 100,000 euros, a profit of a share of 2,500 euros is added to the balance. If losses are made, they will again be deducted from the total balance. Due to the waiver of the net amount as in the first method, the whole 5000 euros more would be available for trading.
The last method, the Adaptive Core Equity Method, is a combination of the last two methods presented. This combination requires a MM of capital allocation in the core equity method. Subsequently, this allocation is adjusted to the increased or decreased risk. If you start again with a capital of 100,000 euros and invest in a position with 5000 euros, the residual speculation amount of 95,000 euros can be used. If the price moves in the direction of your own position, the risk on the entry price can be reduced. In addition, if a stop loss is introduced, the risk of losses can also be reduced.