Money management is nothing but risk management. It is the part of your trading plan (or trading system) that tells you how much money (as in % of trading capital) should you risk in a single trade.
Money management (risk control) is is the most important component to your trading success. You could have the best trading system in the world, but without proper money management you could lose your entire trading capital.
So how much of your trading capital should you risk in a single trade? This all depends on your trading capital. If you have a very large trading capital, it should not be more than 0.10-0.50% of your trading capital. If you an individual with a trading capital of Rs. 1,000,000.00 (Rs. one million), then your maximum risk per trade should not exceed 2% (Rs. 20,000.00) of your trading capital.
If you trade Nifty Futures with a trading capital of Rs. 1,000,000.00 and the difference between your entry price and stoploss is 100 points (or Rs. 5,000.00), the maximum number of Nifty Futures contracts you could take a position in would be only four.
Money management thus dictates the number of shares or contracts that you should ideally trade in to keep your maximum loss per trade within your money management rule.
Sound money management and risk control are the keys to being a profitable trader. It is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure.
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