Risk and Money Management for Day and Swing Trading

A Complete Guide on How to Maximize Your Profits and Minimize Your Risks in Forex, Futures and Stock Trading

Wieland Arlt

• Publisher: PublishDrive
• Year: 2021
• Print ISBN: 9783982177601
• eBook ISBN: 9783982177618
• Topic: Business
• Subtopic: Trading
• Index: Business

Make your trading success predictable!

Professional risk and money management is indispensable for every trader in order to improve trading results permanently and sustainably. In the heat of the moment, this is often neglected. Wieland Arlt outlines simple methods that can be implemented in practice with little effort to improve your day and swing trading.

He explains different concepts for various trading styles, so that short- and medium-term oriented traders are individually accompanied from the planning of a trade to the choice of the appropriate financial market. Wieland Arlt gives practical advice and demonstrates that professional risk and money management make trading success predictable.

Part 1: Becoming a Professional Trader

Chapter 1: The Key to Trading Success

The most important prerequisite for long-term success in investing and trading is a healthy financial basis. This is a fundamental principle. Of course, it is important not only to have this financial basis at the beginning of the trading career, but also to own and maintain it permanently. Without a financial basis, there is no trading. It's that simple. Right?

What does risk and money management have to do with successful trading?

Even though it is a foregone conclusion that the absolute prerequisite for trading is the availability of usable capital, it is important that we pay close attention to this point.

The first question that needs to be answered is to what extent professional risk and money management can help us to maintain and expand our financial base. The second question to be answered is whether there is any difference between risk management and money management and, if so, where it lies. Often both terms are used interchangeably. Everything is then regularly lumped together, according to the motto: Limiting losses has something to do with money management.

At this point, it makes sense for us to separate the two terms from each other and to consider them separately. We will then bring both terms together again in the course of the book.

In order to obtain a concrete distinction between the two terms, we generally understand risk management to be the consideration and planning of a trade or position from a risk perspective. Just to give you the conclusion: The strategy of "putting all your eggs in one basket" is not one of them. Rather, when planning a trade, you must think carefully about how much you want to spend on what. To give you a keyword already here: It is all about limiting losses and thus maintaining your financial base.

With money management, we generally combine the targeted control of the capital expenditure of your investments and the simultaneous optimal planning of the entirety of your trades with the aim of continuously increasing your financial basis. With the right money management, you can plan and control your success in the financial markets from the money side in advance. You will be surprised with the possibilities that await you!

The link between risk management and money management is the answer to the question of how much can actually be achieved with a trade or position and how this is in proportion to the potential loss. We will also discuss this point more intensively and thus be able to judge at the same time whether and to what extent a trade makes sense at all.

To get closer to risk management, let us first take a step back and become more general. At this point, let us first deal with the principle of investment in general. What does it actually mean to make an investment? Why do you invest? What do you hope to achieve by investing?

Whenever you are considering making an investment, you will probably first ask yourself what you can get back from the investment. You certainly wouldn't consider an investment if you didn't get something back, would you? At the same time, however, you will also have to deal with the risk that is inseparably linked to the investment. We know this from almost all areas of life: Where there is an opportunity, there is usually also a risk.

We can be assured that once you make an investment, you automatically take a risk. Why? Because nobody can predict the future. You invest your available resources and hope—that's all you can do—that your investment will pay off.

Did you notice? Incidentally, we are not even talking about "financial markets," "trading," or "investing." No, we are talking about an investment in general. This can go in all possible directions and does not even have to be material. Even if you help a good friend move or clean out the basement, it is an investment . . . in your friendship. And you certainly expect your friend to help you the next time you move or assemble a piece of furniture. This is, so to speak, the repayment of your investment; the certainty of being able to rely on each other is the return. But that's another matter. What is at stake here is to make it clear that, ultimately, we all invest regularly. More or less consciously, but we do.

For example, we invest time in an interesting project at work. On a private level, we invest our commitment in training for an important soccer match. Yes, we even invest in a friendship or relationship . . .

. . . and we also invest capital in promising companies or industries.

And what happens if an investment made does not pay off?

We take a risk with all investments. Namely, the risks that these investments fail and we either get nothing in return for the resources invested or, in the worst-case scenario, lose our commitment altogether: the project is cancelled, the soccer match is lost, the friendship fails, or the relationship goes to pieces. Our invested resources of time, power, and energy are lost.

Of course, we could not have known this beforehand; otherwise, we would not have gotten involved. Nevertheless, the risk of failure was always there, as was the chance of a positive outcome: the career boost after a successful project, the championship after a soccer match, the lifelong friendship or relationship.

As you can see: in the end, we invest regularly in our lives and hope that the resources we use will bring a "return" and that our investment will "pay off" for us. But we also know, of course, that we cannot always "win." Then it is simply said that nothing has happened except expenses.

Hand on heart: does that prevent us from conscientiously preparing for a new project next time, from training intensively for a soccer match again, from forming new friendly bonds again, or even from entering into a new relationship? No, of course not. But we may become a little more cautious, picky, or focused. Perhaps we will prepare ourselves even more intensively. Why? Because we want to prevent our commitment—our investment—from failing again. In a figurative sense, we practice risk management to protect ourselves against serious and excessive failures.

Now, before we go into too deep philosophical reflections on life, let's get back to the heart of the book and consider your financial investment in a promising company or industry.

And again, it is not a matter of course that your investment will work out: the company you invested in may go bankrupt or the entire industry may become outdated. In the worst case, your money—your invested capital—is lost.

Whether we like it or not, this "potential danger" is in the nature of any investment. And that's exactly why we get something back for our investment that exceeds the amount of the investment made. There's interest or dividends. Perhaps additional price gains will also tempt us to take additional risks so that our risk is worthwhile. And the higher the risk taken, the greater the potential reward for us investors must be.

This brings us directly to you. Why do you invest? Why are you trading? Why do you invest your capital? Probably in order to make a profit from it. Maybe you expect a dividend, maybe you expect interest, maybe you expect price gains. Maybe all of them together.

At this point, let's just assume that you trade stocks, currencies, or futures. What does risk and money management have to do with your successful investment—your trading?

Through risk management alone, you are already in a position to control the risks that are always associated with an investment. Risk management is the only way to transform the uncertainty associated with an investment into a certain degree of security.

And money management? What's that got to do with it? Quite simply: Where risk management saves you from being shipwrecked by an investment in trading, clever money management helps you to optimally control your trades—your investments—and to consistently build up your assets.

Both in combination are indispensable for long-term success in trading.

Why is risk and money management essential for successful trading?

You have certainly already studied the financial markets, prices, and charts in depth and are familiar with the many different patterns that can be found in a chart. Perhaps you have been following or trading the markets for a long time. Then you have certainly heard about the collapses of the world's stock markets or even experienced them personally as an investor or trader.

Before we continue here, let's go back a few years. Back in the "good old days," recommendations such as "buy a share, keep it and get rich over the years . . ." could be implemented with a clear conscience. The whole subject of risk management was viewed with suspicion by many, as a stock was almost risk-free in times of rising markets, flourishing economies, and bubbling profits—if you held it for a correspondingly long time. Investors and traders were able to handle ...

Table of contents

• Introduction
• Part 1: Becoming a Professional Trader
• Chapter 2: Risk Management
• Chapter 4: Risk and Money Management in Practice
• From being a professional to becoming a top trader
• Chapter 6: Risk and Money Management 2.0
• Chapter 7: Success Can Be Planned In Small Steps to the Big Goal!
• Closing words
• About the Author
• About the Torero Traders School