Money-management rules are used to calculate position size before entering a trade and to manage the trade when it is open — whether to add to the position, reduce it, or exit completely. Most popular money-management approaches (fixed-fractional position sizing, Optimal f, etc.) are based on total account equity and do not consider the risk parameters of the trading system to which the approach will be applied.

The following framework is designed to define money management for a system’s entire life cycle rather than in terms of the next individual trade the system produces. In addition to stop-loss points and profit targets for specific trades, it is necessary to define total risk for a specific trading system’s lifespan — from inception to the point at which its peak-to-valley drawdown exceeds a predetermined amount.

Another (often overlooked) role of money management is to determine when you should periodically withdraw money from your trading account. The answer lies in the relationship between the amount you risk and any remaining capital.