The Risk of Trading: Mastering the Most Important Element in Financial Speculation

CHAPTER 8

Business Risk Management for Traders

In the previous chapter, we discussed how insurance companies assess not only individual policy risk such as an individual home that is insured but also the portfolio of exposures in a particular product line, geographical area, or specific peril. Most of the discussion in this book so far has been devoted to trade risk, or the amount or chance of loss on any given trade. Various risk identification, assessment, control, measuring, and monitoring techniques were discussed so the trader can execute each trade with the historical hopes of yielding the most risk-to-reward value.

In Chapter 8 we take our trading magnifying glass and focus on the business of trading and related exposures. This could be the most important chapter you read in this book or any other book on trading survivability. The reason is that most traders do not fail in trading due to one trade. It is often a series or a large stretch of trades that were not successful, and the trader did not take risk-based actions after identifying that these events were unfolding. In other cases, it was not a trade but one unforeseen event that forced the trader to close his or her business. Traders often focus so much on each trade and lose perspective toward the goal at hand. We are constantly measuring ourselves in dollars when we should be keeping score through a KPI compliance dashboard. This chapter is geared toward identifying the quadrant-two risks that each trader or group ...