| Updated: October 23, 2025Money management and risk
You will learn about the following concepts
Ruin is another highly possible scenario in trading.
- Risk and money management in Forex
- Risk of ruin
- What does money management strive to accomplish?
- And more…
When it comes to trading, investors tend to pay more attention to the reward side of an investment. However, it is only half of the so-called portfolio design. The other half of the investing process is usually associated with money management and the nature of risk.
Money management refers to the risk side of an investment; it is a comprehensive set of measures designed to avoid financial ruin. It is concerned with measuring and managing the risk of loss and with utilising your capital in the most efficient way.
In investing, there is usually a trade-off between reward and risk. Neither of these concepts can be measured precisely, and the amount of risk to reward depends on how tolerant you are of risk. It is human nature to feel pleased when rewarded, but different traders have varying views on the level of risk they are willing to accept. In investing, no reward is guaranteed, but, unfortunately, risk is always present.
Risk is the magnitude and probability of a loss, or a series of losses, that an investor may realise when trading in the global markets. The probability of a loss occurring is as important as the size of the loss itself.
No trading system is 100% profitable
There has never been a trading system that has avoided a loss on every trade – a system that provides its user with a 100% chance of profit. Such a trading system is an ideal that has never been achieved, despite many efforts over the past decades, and probably never will be. The pursuit of such a flawless strategy can become an obsession, yet losses are inevitable.
Risk of ruin
Ruin is another very real scenario in trading. Every day traders are forced out of the market, chiefly because they did not employ measures aimed at assessing and controlling risk. The space between flawlessness and ruin represents the compromise between profits and losses – also described as the rewards and risks of a trading strategy. The possibilities between flawlessness and ruin are limitless and, to a great extent, depend on one’s personal preference for risk.
What does money management strive to accomplish?
We can say that the trade-off between rewards and risks determines the eventual success or failure of a trading strategy, which brings us to the main goal of money management – to maximise one’s return while keeping risk to a minimum. Put simply, it seeks to make regular, consecutive profits with the minimum probability of losing your entire capital. The extremes range from trading highly leveraged options and futures contracts with an untested system, on the one hand, to holding strictly cash, on the other. In theory, a cash investment holds no risk; a cash position is not associated with the danger of losing your capital. However, some experts argue that cash positions are susceptible to inflation risk, because during inflationary periods they may lose purchasing power.
- Trade Forex
- Trade Crypto
- Trade Stocks
- Regulation: NFA
- Leverage: Day Margin
- Min Deposit: $100
Trading systems should always regard risk
Beginner traders should note that even a good trading system is not protected against losses if it does not account for risk. Money management can turn such a system into a reliable one, but money management alone cannot rescue a system that does not work.
When designing a strategy, every trader’s first move should be to find a workable system – one that consistently achieves more profitable trades than losses. The system may be based on fundamental indicators, on technical indicators, or both. Every successful trader follows a different method or system of entering the market, but all implement a money-management system to protect themselves against losses. Most traders will confirm that money management is, in fact, far more important than the trading system itself.
The second step is to determine in which markets the system will trade and which events/indicators it will focus on.
The final step is to combine these systems and events into a strategy, a point at which the concept of money management comes to life.
Another fact worth noting is that money management theories mostly focus on price and size (which is why money management is also called “position sizing”). This means that the assessment and control of risk are technical in nature. Traders who use fundamental analysis alone are usually unable to evaluate risk in the marketplace. For example, it is difficult to define the initial capital, the trade size in shares, currency pairs or futures contracts, and the execution style. All these issues depend on technical studies and the use of price action.
We can say that the aim of money management is to maximise favourable situations and avoid, or at least diminish, those that could lead to a loss of capital.
Next, we shall discuss the various risk concepts.