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What is the difference between 'money management' and 'risk management'?


#1

I see these two terms everywhere. What is the difference between the two, I usually see them together, and to me they seem one in the same. However, they must be different, what does each do, and which should I be focusing on?


#2

These terms are somewhat subjective, but…

Money management is a term used often in the trader community. It involves deciding how large a position to take on trade entry, how to scale into or out of a position, etc. It also involves setting aside enough capital that you can make more than a few mistakes and still not blow up. Sometimes it involves averaging in when price goes against you (very dangerous), other times it involves taking profit on part of a position and keeping the rest of the position in case you have a “runner”. Done well, money management can amplify the value of your entry/exit signals.

Risk management is more of an institutional term. It involves statistical models for such metrics as VaR (value at risk), CVaR (conditional value at risk) and many others. Risk managers at banks, hedge funds, brokers, etc. will estimate portfolio risk across managers, across instruments, etc. to comply with financial regulations, and to reduce the chance that they’ll be exposed to deep losses in case of a big event in the market. They will also look at subjective things like counterparty risk, technical risk, model misspecification risk, etc. etc. In this sense, Risk management attempts to manage all the material risks a firm faces. Easier said than done!


#3

Money management is the way you allocate funds across the portfolio(s) of instruments and strategies. In the most simple case it’s the way you evaluate the trading size for the next trade. Risk management is the set of ways to control risk, not only systematical, but also human, software, hardware, etc. Normally it involves stop orders and methods that ensure their proper execution, along with fat fingers limits, margin check, routine maintenance procedures and so on.