I want to know the meaning of MONEY MANAGEMENT in simple terms with examples.
Money Management in trading parlance is Risk management.
check this article - http://www.investopedia.com/articles/trading/09/risk-management.asp
Money Management is all about making sure that you are managing your money efficiently. This is actually a complex topic, often taken quite lightly by traders.
Barring sheer luck, its quite impossible to make serious money without a proper money management framework.
Money management is a broad term and it has few things under its hood - some of which that are on top of my mind is estimating expectancy, reward to risk ratio, position sizing.
Estimating Expectancy - Even before you put in a trade, you should have a fair sense of the expected outcome. You can do this by a back testing procedure. For example if were to trade Nifty futures based on a trading model then you sould say to yourself something like...'I've got 60% probability to be profitable on this trade'. That 60% is the expectancy of the trade.
Reward to Risk Ratio - The ratio tell you how much you are likely to make for every rupee of risk you are taking. For example your target and stop loss on a trade could be 100 and 50 points respectiveley, the your reward to risk ratio is 100/50 = 2:1, meaning you are likely to make a 2 Rupee gain for every Rupee of risk you are taking.
Position Sizing - If the trade you have identified has a great reward to risk ratio and higher expectancy, say 75% chance of being profitable then you may want to have a higher exposure to the trade. Likewise you may want to scale down on a trade that has only a 25% chance of being profitable.
As I mentioned, this is a vast topic and can get quite complex. If you aspire to be a serious trader, I would strongly recommend you reading Ryan Jones book called The Trading Game
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In simple terms ‘Money Management’ is nothing but managing your money efficiently and ensuring that you stay in the game for a long time or rather life long. It’s all about budgeting, like how we do to maintain/sustain our household expenses. In trading if you can manage your money well, you become a winner. For eg. If you have 1 Lakh capital for trading and you trade utilizing your full 1 Lakh then, if markets starts to move against you or your analysis, then there are chances that you can get margin call from broker (if you are using leverage). Furthermore, you don’t get your full 1 Lakh to trade for your second and subsequent orders. You should always keep buffer fund to absorb the shocks of trading.
A simple Money Management technique is if you have 1Lakh capital, divide it into 10 parts (this you can decide as per your risk appetite) and trade with only one part i.e. Rs. 10,000/- and keep the balance 9 parts i.e Rs. 90,000/- as your buffer fund. Hope this answers your query.
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