Money management generally involves allocating funds to various needs, and when it is about money management for a trading portfolio, it is the allocation of money to the various trades or trading systems. For a money management executive the concept can be simplified and split into two, as trade management and position sizing.
Trade management is important merely for the reason it affects your trading capital, and that results are direct and instant. For trading, both trading management and position sizing are equally important, and interdependent on each other. You have to understand both the aspects of money management to be more than passably good at trading.
Trade management for portfolios
When it comes to trading, money management is vital to how a trader manages his individual trades and allocates money to the various needs. This is not just about allocating money, but also the management of the entire portfolio. For each individual trade even before it is placed, you should keep track of stop losses and profit targets; this helps a trader to lessen the chances of play of emotions, letting him exit the positions at the right time. Trade management helps a trader by providing him with existing tools to limit orders, and to exit out of them with either a profit or a loss, depending on the objective for which the trade had been executed. Stop losses are meant to exit your position and cutting your losses, when the market moves against you, which cannot be anticipated. Just like that, the concept of trade profits lets you exit your entire trade or individual trade when the market or the portfolio hits the pre determined profit target. Profit targets and stop losses can be used in various combinations to reduce risk in trading, or increase your profit margins.
Portfolio Position Sizing
This is the number of shares you should place in a trade, or how many contracts you should place. The risk you take on each individual trade will also affect your position sizing, and this in turn will affect the trade you decide to enter into. The size of the portfolio decides the risk you will involve yourself in, and the potential for higher returns. The risk and the returns increase with increase in size of the portfolio.
As you can see the two aspects that should be familiar to a money management executive are interrelated.