| Updated: September 15, 2025Social trading and money management
This lesson will cover the following
- What is money management?
- The importance of money management in social trading
- Final words
Money management is one of the most important aspects of trading. No matter how good you are, you’re going to lose in many of the financial operations you undertake. Good money management will help ensure that even when that happens, you won’t have to endure devastating losses. You have to be strict with your investments; otherwise, the risks you take will be unjustified. This section will help you learn how to handle things from this perspective and why it’s important.
What is money management?
Money management, as the name suggests, is the act of managing, regulating, handling and otherwise supervising your personal finances. In the context of trading, it implies that you have a very firm grip on what you need to do with your money at any given time in order to ensure that you won’t go bankrupt.
Money management is applied by devising a set of rationally thought-out rules. After you’ve come up with this set of rules, you need to follow it. This involves determining crucial portions of your portfolio if you wish to diversify (for example, trading 10% in stocks, 15% in forex, etc.), the maximum investment you are willing to make on a single trade, the amount of money you can invest in relation to the chances of success, and more. It’s your personal strategy within a strategy.
Money management is built on the idea that you have to be responsible and follow your own rules no matter what. It’s especially important to abide by what you’ve devised in your head when you decide that a deal is a ‘sure thing’ and you’re ready to invest far more than you should. Money management will help you control your own greed. Responsible money management is what differentiates good traders from bad traders and gamblers.
The importance of money management in social trading
When you choose social trading, you take full responsibility for your failures and full credit for your successes. Of course, it was ‘that one trader’ who gave you a tip, but ultimately you were the one who decided to act, as well as how to do it, how much to invest and more. Even though social trading is simpler than other types, it’s not as easy as seeing that someone believes an event is imminent, so you should invest. It takes planning and understanding. This is where money management comes in handy. The information you receive might or might not be accurate, but it’s your responsibility to recognise that it’s quite possible to lose, so you shouldn’t be reckless. Money management will ensure that you consolidate your profits and cut your losses.
Let’s illustrate this point with an example. An experienced trader thinks that the shares of company XYZ will go up in the near future, so he decides to start buying. Since he’s experienced and has made considerable profits in the past six months, many traders decide to follow his example. Among those traders we find A – a responsible new trader who’s spent quite a lot of time developing good money management habits; and B – a devil-may-care trader who is after a quick buck and hopes to get it via social trading.
They both decide that the tip is good, so they, like many others, start buying XYZ shares. However, B buys a lot more than A. Whereas A follows his money management routine, B decides to go all-in. This is the type of move you should never make. Let’s say they both win because the prediction was accurate. In this case B will earn a lot more than A, at least in the short run. However, in the long run you can be sure that at one point B’s gambling style of trading will lead to his financial ruin. The fact that he got lucky a few times doesn’t mean that he’s going to be lucky forever.
Money management basics
Based on the strategies you wish to employ and your trading style, you are the one who will have to devise your money management rules and develop the habits. However, there are a few things we can help you with. First, you need to decide the maximum amount you are willing to risk on a single trade. Some traders feel that 1% of their overall portfolio is quite enough. Others think that it’s sometimes better to go higher, but not above 5%. In our opinion, you should never risk more than 3% of your portfolio on a single trade – 5% if you’re more than 90% certain of the successful outcome. This way, no matter what happens, you ensure that a few bad trades won’t bankrupt you. Always think in the long run – yes, risking less means making less, but if you’re good enough at making the right calls, then you won’t have to invest more. And if you’re bad, this will protect you (at least for a while) and hopefully help you figure out your mistakes.
If you want to copy a trader, never allocate more than 10% of your portfolio to a single trader. Also, it’s a good idea to test him for a while in your demo account to see whether he will actually make you at least some money in the short term. If he doesn’t, then you can decide whether you’re willing to wait for a long-term strategy to pay off and whether it’s worth the risk.
Be firm and disciplined. Find the rules that match your style of trading best and then follow them. There is no other way to become a serious trader.