Saturday, January 18, 2014

Money Management or Position Sizing – Part 1: WHAT IS IT?

As frequently mentioned earlier, Money Management is one of are the most important aspects of a trading system, along with positive expectancy and self management (trading psychology), which many professionals even believe that these aspects are the “holy grails” of trading.

While Money Management is extremely crucial, it is important to note that having a trading system that gives you a positive expectancy should be in the top priority when you are developing a trading plan. Because if your trading system has a negative expectancy, no matter how well your money management strategy is, you’ll still lose money in the long term.

This is like what Alexander Elder said in his book, Come Into My Trading Room:

A good trading system gives you an edge in the market.
To use a technical term, it provides a positive expectation over a long series of trials.
A good system ensures that winning is more likely than losing over a long series of trades.
If your system can do that, you need money management.
But if you have no positive expectation, no amount of money management will save you from losing.

What is Money Management?
In his book “Trade Your Way to Financial Freedom”, Dr. Van K. Tharp define “Money Management” as the part of your trading system that answer the question of “how much?” throughout the course of a trade.
How much essentially means how big a position you should have at any given time throughout the course of a trade.
Therefore, he refers to Money Management as “Position Sizing”.

The purpose of Position Sizing is to limit the size of what you are prepared to lose / risk in any single trade to a percentage of your total trading capital.

Some people may also call this as “Bet Size”.
Hence, Money Management, Position Sizing, and Bet Size are basically referring to the same thing, which is to answer “how much” in your trading system, as discussed in this post: Trading System: What Is It and Is It Important?

To be continued to: OBJECTIVES of Money Management or Position Sizing.

To view the list of all the series on this topic, please refer to:
Money Management / Position Sizing

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2


Zero Brokerage said...


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Hi Chonghe,
Thanks for putting my blog link in your blog.
I put yours in my blogroll too.
Hope the readers can learn from your blog too. :)

chonghe said...

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