Money Management 2

Define Risk

There are two kinds of risk level to determine before going ahead with money management framework- i) monetary risk and ii) technical risk.

Monetary risk
It is simply the dollar amount willing to risk for each trade. Usually it is a percentage of the account size e.g, 1%, 2% or 3% etc.

Technical risk
It is a price level at which the position will be closed, usually in a loss. It can either be fixed ( e.g, support/resistance line) or dynamic ( e.g, trend following with moving average).

Monetary risk + technical risk = position sizing

So far, it is easy to calculate position size for a given set up. In the past, I used to end up here thinking that my trading plan was complete. I know my risk, TA stoploss is there and position sizing is perfect! But there is a much bigger thing to consider.