Money management, in the context of trading, basically means implementing techniques and strategies to limit risk while simultaneously increasing the reward. To achieve this goal, traders usually tweak the trading position size by either increasing it or decreasing it. 

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If you’ve just started to invest in the stock market, money management is something that you should definitely know. Here’s some more information regarding the strategies that you can implement to reduce your risk and increase reward. 

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5 money management strategies for traders.

 
There are many money management rules in trading that traders can implement. Let’s take a look at 5 of the most popular ones.

 

1. The 2% rule 

According to this money management rule, traders wanting to invest in the stock market shouldn’t take the risk of more than 2% of their total account balance for every trade. This is a very conservative approach that’s perfect for beginners and traders not wanting to take high risks.

  

2. Fixed fractional method

As per the fixed fractional method, you would have to first buy a stock for a particular amount of money, say Rs. 10,000. Once the value of the stock goes up and reaches Rs. 20,000, which is double your initial investment, you can then purchase more shares of the same company. This will help reduce the amount of risk that you undertake.

 

3. Fixed ratio method 

The fixed ratio method is very similar to the fixed fractional method. According to this, you will have to first purchase a stock. Once the stock makes a particular preset amount of profit, you can then purchase more shares. And then again, once the stock makes double the preset amount of profit, you may then purchase even more shares. This goes on and on till the time you decide to stop.

  

4. Optimal F method

The optimal F method relies on your past performance to establish your position size. All that you have to do is take a look at all the trades that you’ve made profits on. Then, come up with an average position size. This can be your baseline position size for all of your future trades.

 

5. Secure F method 

The secure F method is one of the most refined money management rules in trading. An enhanced version of the optimal F method, the secure F method involves determining the position size that gave you the maximum amount of returns on all your past trades. Once the position size is determined, it is used on all future trades.