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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. #131
    Trader Sixteen's Avatar
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    Traders in forex need great money management and risk management to be able to trade good and because forex is risky, applying this management will help us to deal with risk and give us the very opportunity to trade good. When we say risk management, it's the ability to ensure we minimize the risk we can face with forex and for money management, it's about managing our capital and ensure we trade with the right lot size.

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  3. #132
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    There is no much difference and money management is a great deal in forex as traders must take time to build the perfect money management which will help us to reach our goals. Forex is a good business and if we can take time to manage risk, we will have a great means to enjoy this business so much more. We must think on the need to manage risk and we must take time to build our system so that we can really make it. Great traders can manage their risk and take time to improve themselves to see they can make success.

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  4. #133
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    A trader need both risk management and money management for trading that will make our trade simple and successful we always have to learn well and make our system with learning and knowledge , like we must have to select volume according to the account and minimize our risk and try to gain success for better results .

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  5. #134
    Trader Lyon's Avatar
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    Quote Originally Posted by Tonycee View Post
    There is no much difference and money management is a great deal in forex as traders must take time to build the perfect money management which will help us to reach our goals. Forex is a good business and if we can take time to manage risk, we will have a great means to enjoy this business so much more. We must think on the need to manage risk and we must take time to build our system so that we can really make it. Great traders can manage their risk and take time to improve themselves to see they can make success.
    There is a different, first, when we are to invest money to trading, then we have to make sure that we have the amount we can afford losing. This means, we should not invest all our money into forex. Then on the concept of risk management, it has to do with the risk we are taking on each trades, it has to be done with good money and risk management, that is where the 2 percent rules of trading comes to place.

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  6. #135
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    Quote Originally Posted by D'mastermind View Post
    Risk management is a must in the market because the market is filled with uncertainty so if you are not careful, you will loss your money in the market. With that been said each trade should have the same risk and money management so that we don't really end up losing all our money , that is what I have been able to learn and understand from the market.
    Yes i agree with you risk management is very important because Forex is very risky business because of market's uncertainty this is very unpredictable market that Change frequently if we don't understand market and fail to manage risk it will definitely make us loser and we lose all money here that dangerous for our trading career .

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  7. #136
    Trader layigold's Avatar
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    Risk management comes before money management because you will need to know your risk before taking any trade and this can be determined by a number of ways or factors . Suppose I have a $1000 account , I can only afford 5% risk per position and in a situation where I see good trades to take it means the risk will be 2.5% per each position and if the set up looks good in such that the ideal protective stop loss is covered by the risk target, I will execute the trade and in the process you have managed the money as well. There is no way you can manage money in forex trading without managing your risks.

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  8. #137
    Trader Azis Muslim's Avatar
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    Quote Originally Posted by fahaddd View Post
    Yes i agree with you risk management is very important because Forex is very risky business because of market's uncertainty this is very unpredictable market that Change frequently if we don't understand market and fail to manage risk it will definitely make us loser and we lose all money here that dangerous for our trading career .
    Even so, there is always chance for us to take as good momentum to enter the market. The number of accuracy can not always stay high but still we must always remain in good analysis and never rely on emotion. Using money management is the key to manage our trade and to help us avoid against such thing as greed. Meanwhile, risk management is the part of money management which useful to manage only the risk we make on each trade open.

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  9. #138
    Trader sniper007's Avatar
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    I see it as being self explanatory because money management means managing the money we have rightly then the risk relates with the risk we take per trade when trading the market. If we take little risk then we will make more and be able to sustain our trading account for a long time.

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  10. #139
    Trader Obaforex's Avatar
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    Quote Originally Posted by sniper007 View Post
    I see it as being self explanatory because money management means managing the money we have rightly then the risk relates with the risk we take per trade when trading the market. If we take little risk then we will make more and be able to sustain our trading account for a long time.
    well, although most traders often think in the same way that this two terms are self explanatory or the same in some sense but this is not true and that is why this thread was created in the first place to point out the distinctions between both term for proper understand and appropriate use of the words. when you read the introductory post you will understand better that risk management has more to do with the risk to reward level of your trades not just the percentage of your account you are risking par trade.

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  11. #140
    Trader ara's Avatar
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    No need to explain at length, because the explanation is very simple. Risk management is part of Money management, while money management is broader, not just about managing risk, but also managing everything about your finances, including profit, cash flow, etc. I'm not an expert in money management, you can asked the bachelor of economics. I just take a simple definition of money management in forex trading. Actually the ratio of risk and reward is a combination of risk management and profit management, so it's not just about risk management only.

    Quote Originally Posted by Obaforex View Post
    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
    I don't agree with that

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