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Risk Measurement I

Every trader who enters the marketplace must balance two opposing considerations—reward and risk. A trader hopes that his analysis of market conditions is correct and that this will lead to profitable trading strategies. But no sensible trader can afford to ignore the possibility of error. If he is wrong and market conditions change in a way that adversely affects his position, how badly might the trader be hurt? A trader who fails to consider the risks associated with his position is certain to have a short and unhappy career.

A trader who purchases stock or a futures contract is concerned almost exclusively with the direction in which the market moves. If the trader has a long position, he is at risk from a declining ...

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