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

DEFINING RISK AND RISK MANAGEMENT

Various definitions of risk management are used depending on the industry, source, and purpose. For example, corporations tend to use a definition to define the purpose of their department with the same name. Others use their department's mission statement as the foundation for how the term is defined. The basic theme for most definitions of risk management includes the decisions made to protect the entity's assets and minimize the adverse effects of activities we perform in order to attain company goals. In the trading world, the term assets can refer to many things. Logically, our trading capital is probably one of our most essential assets. Capital in trading is the ticket to the show. Simply put, if there is no capital, there is no business; hence the important link of risk management to capital. Later we will discuss the risk identification process in depth. It is critical to also define the logical classification of a trader's capital or related company assets before the risk management process takes place. If not, how can we protect an asset that we haven't identified as an asset?

If risk management is based on the premise of protecting assets, we need to understand the term risk, bypass the lip service often given to the term, and define it, at least within the scope of this text. Being a professional risk manager and trader for many years, I've come across several definitions of this simple yet complex word and would probably receive 10 ...