GENERAL IDEA OF MONEY MANAGEMENT

Important parts of financial market trading is money and risk management. If market analysis (either technical or fundamental one) exists to give answer to the question "when and to which direction a position should be opened", money and risks management answers to the following questions:

• How to provide higher speed of money growth when risk is optimal;
• How to minimize risk when money growth speed is optimal;
• With which volume certain positions should be opened (including dependence of results of trading for previous periods);
• What a maximum consolidate volume position should be etc. 

First of all every trader should understand and accept the fact of losses: they are essential part of trading as well as profit. They exist like day and night, or like two sides of one coin. No matter how simple this truth is, not any beginning trader can accept it. The beginning traders' strive to make only profitable positions (an idealism, if it can be said so) leads to the breaking of general rules of money management. It works this way: unprofitable transactions are not closed (because of the hope that sooner or later the situation at the market will change and these transactions will bring profit), and profitable transactions are closed at once after the appearance of any small floating profit (see p.5.2). 

It is not right to hope that in process of practicing of trading skills you should strive to define with the help of analysis the direction of the market and open transactions only in the direction of the future movement. It is not possible to reach this goal. In any case, nowadays science does not find any hypothetic possibility of solving this task.

What does it mean? It means that at any moment the position has its risk. In particular, there are risks of unprofitability or of gaining the profit but not in appropriate size. Also there is risk of losses. The tasks of money and risks management are:

• to minimize size of losses;
• to minimize the influence of series of losses (of forecasted sequence);
• to minimize the losses in time of unfavorable conditions for market strategy;
• to maximize the profit;
• to compensate the earlier losses in favorable conditions of market strategy, and to gain maximum profit from this situation.

Here it has to be noted that that risks and money management takes place if a trader has a certain formalized strategy. In other case (if a trader took part in trading this morning because he was in high spirit, and yesterday because of the pain in his neck) we can discuss only factual possibility (1taking into consideration the given statement) of analysis of this result. Unfortunately, the experience shows that if beginning trader (that has lack of skills and knowledge) understands suddenly that he "sees the market" (i.e. using intuition he foresees the future of the market), it leads to "spontaneous" transactions-making, that will have for the result full loss of deposit, and statement analysis will be just a try to understand, what was the reason of such a result and where the most significant mistakes were made.

It is not necessary to turn strategy into mechanic trading system, but it should include some general rules, that give answer to the main questions (see p.6.3).

The second moment that has to be noted, it is tied connection between the potential profit of strategy with its risk. From the first sight it is possible to say that this connection looks like proportional one with a note that it is of line character. It means that in general case it is possible to expect that risk decrease will lead to the decrease in profit, and the profit increase will lead to increase in risk. But there are cases when increase in risk does not lead to increase of profitability, and vice versa. The ideal goal of money and risk management is to achieve the opposite situations: the increase in profit without increase in risk and decrease of risk without decrease in profit. This goal can be achieved.

Let us note an important thing, that from mathematical point of view is an doubtless fact: if a strategy includes positive mathematical expectation (even the smallest one) with the help of money management it is possible to achieve exponential deposit growth. In other words if there is a strategy where the trading of the constant volume, it gives a growth of deposit, no matter how small it is, there is a possibility to choose for this strategy the rules of money management that will make the exponential deposit growth instead of leaner one. The conclusion of this is the existence of some optimal volume of transaction for every strategy (for self-education we can recommend to meet with materials, that are devoted to optimal Phi (a letter in Greek alphabet)). We have no such a possibility in our course to make deeper research and mathematical calculations. The general rules of money management are given below.