Money Management is all about controlling your risk exposure by properly sizing your Rs (Risk Units). If you keep your losses small and allow your winners to run as far as the current trend will take them, you've achieved the real secret to making money in the markets.

So, what is an R — Risk Unit? R is the term used to describe a Fixed Unit of Risk – the maximum amount you are willing to lose on any trade. Each trader should have a predetermined maximum amount they are willing to risk on every trade; and of course, traders should only enter trades that offer a favorable Risk to Reward ratios (e.g., 1 to 1.5 or better). This allows the trader to know how to share size each trade properly, and also how to measure the profitability of a winning trade both during and after the trade is completed. This will aid a trader greatly in the area of money management.

Here is an example of how to calculate and use the R properly. Let's assume a trader is willing to risk $10 on each trade. For each trade considered, the stop (difference between the entry price and the stop loss exit price) must be calculated first and then the shares size is adjusted so that if the trade is stopped out the loss will only be $10, or just one R. Note that trade slippage needs to be considered when sizing adjusting the position.
Trade number 1 has a 10 cent stop. This stop allows up to 100 shares. Here’s the math: 100 shares x 10 cents = $10 (100 x 0.1 = 10).
Trade number 2 has a 20 cent stop, which supports up to 50 shares.
Trade number 3 has a 5 cent stop, which supports up to 200 shares.

Now that the trader has a defined R unit, this can be incorporated into a trading plan and used to measure the profitability of winning trades.
Continuing with the trader above, which has a $10 R unit.
If a trade is up $20, that trade has a 2 Rs profit.
If a trade were up $40, that trade has a 4 Rs profit.
If a trade was up $5, that trade has a ½ R profit.

Traders can incorporate this into a trading plan by having a target number of Rs for a given day or week, both on the profit side and the loss side. For example, a daily profit goal of 5 R's and a daily loss limit of 3 Rs. This trader could have 2 winning days and three losing days at max R targets and still have a profitable week. Also, once your daily or weekly profit target is hit, consider taking some time off and enjoying life (Stop trading, why risk further losses?).

As a general rule, I'll size my R value to be 1/5^th of my daily loss limit. For example, as a level I trader, my daily loss limit is $30; and my minimum weekly target is $30. I therefore choose $6 ($5 is a better working value as this allows for slippage) as my R (Risk Unit), which allows me to suffer 5 straight losses before I have to quit for the day; and I must earn 2 Rs per day and 6 Rs per week to earn my weekly target objective.

To learn more about Risk Units (R), see pages 87 & 196 in "Trade Your Way to Financial Freedom, 2^ndEdition", by Van K. Tharp; and to learn more about Position Sizing, see Chapter 14 in the same book.

Stan Benson