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Thread: Difference between Money Management and Risk management

  1. #1
    Trader Obaforex's Avatar
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    Difference between Money Management and Risk management

    I have read in several posts online where traders use risk management in place of money management hence I felt the need to explain both.

    1. Money management as to do with knowing precisely how much you want to risk on each trade you place in the forex market. For example I have a $1000 account I want to risk 10% on a trade whose stop loss will be 300 points away.
    First calculate 10% of 1000 which will give you $100
    Then divide 100 by 300 which will give you 0.3 ( your lot size)
    Which implies if you place a trade with 0.3lot and place stop loss 300points away, your maximum loss can not exceed the $100 you already budget to loss in the worse case scenario.

    2. Risk Management on the other hand has to do with observing your trade risk to reward ratio and deciding if such trade is worth opening or not. For example if a trade requires 1000points for stop loss and the profit expected from such trade is only 100 points this will give a risk to reward ratio of 10:1 which is terrible.
    But another example where a trade requires only 300 points stop loss and has the potential to make 600points will have a risk to reward ratio of 1:2 which is great

    So always pick only trades with good risk to reward ratio and remember to do your money management correctly and keep risk low.

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  2. #21
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    money management and risk management both very important for us. the trader which will not follow it, will not survive at all for long in this business trader need to understand how to manage the money and check all possible conditions of the market too when they want to make a decision in their own trade later. each trade should have the same risk and money management so that we do not really end up losing all our money.

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  3. #22
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    This is an important thing which is used in trading. i gives advice to all trader that you takes all knowledge about this business.we make a high money from this business if we takes big risk in this business.when we select big size order in this business then our risk become so high and if price moves according to our order then we get profit.

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  4. #23
    Trader sniper007's Avatar
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    There might be some different but we don't need to allow that confuse us, because the use of money and risk management in a trading trader's account indicates seriousness and discipline so all traders has to make sure that they keep on doing the right thing and make sure they don't trade without being disciplined. The forex trading business is all about risk and risk management.

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  5. #24
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    Thanks for explaining the difference between the money management and risk management these two are very important concepts and well illustrated by you. Money management must be followed by every trade because money management can lead to success.

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  6. #25
    Trader Obaforex's Avatar
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    Quote Originally Posted by tahirmuddassar View Post
    Thanks for explaining the difference between the money management and risk management these two are very important concepts and well illustrated by you. Money management must be followed by every trade because money management can lead to success.
    You are welcome, am glad you appreciate the effort put into trying to explain both for proper understanding. Some forex traders just do not understand certain things about the forex market and will not appreciate effort to make them do and this partly account for reasons why they loss at time because they are doing the right thing wrongly or they are doing the wrong thing with right intension. This is why i consider it important to know exactly what you are doing each time. So know for certain when you are doing money management and know for certain when you are doing proper risk management.

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  7. #26
    Trader Lyon's Avatar
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    Money management has to do with the amount of money you are putting into the market as a trader and then risk management is the risk you are taking per trade, we all have to understand what money and risk management is when trading. Because on each trades we are taking a trader needs to have good risk management attached to it.

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  8. #27
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    Forex is a profitable but a very risky trade which is important that traders try as much to understand their risk and look properly into understanding the very fact that they need to manage their trade in the right way. Money management and risk management are all necessary to help our trade and hence a trader puts them into plans on their trade, it will be a great source of protection.

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  9. #28
    Trader sniper007's Avatar
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    Quote Originally Posted by Ulthred View Post
    Forex is a profitable but a very risky trade which is important that traders try as much to understand their risk and look properly into understanding the very fact that they need to manage their trade in the right way. Money management and risk management are all necessary to help our trade and hence a trader puts them into plans on their trade, it will be a great source of protection.
    If we keep on looking on how profitable it is and not looking at the fact that it has some risk and then we can even loss our money then we can not become a successful trader. Trading takes time and requires so much learning and market understanding for us to succeed. Money and risk management has been part of the business that traders are to implement rightly to have the profits anticipated.

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  10. #29
    Trader layigold's Avatar
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    It is risk management that leads to money management because you cannot manage the account without calculating your risk first . A trader thinks in terms of risk each time a good trade set up is before him and that is what would help you to make a right choice of the lot size to use and also the accurate stop loss target . Left to me , I see both the risk and money management as Siamese twins that cannot be separated at all. If you have successfully managed the risk well , you would have succeeded in money management too

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  11. #30
    Trader Lyon's Avatar
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    Money management applies on your money that you have invested and then risk management applies to the risk you are taking on your trading account, they all are all risk but we have to manage them rightly. However the risk and money management has to be used properly in all trading concept which we are making use of, so they are all important.

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