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

CLASSES OF RISK

Although we will devote intensive study to risks directly impacting traders, such as trade risk or the potential for loss on a trade, it is common to find other classes of risks that typically impact traders’ performance or overall business at least once during their careers. Here are some classes of risks that tend to be overlooked by the typical trader.

Industry Risks

Exposure to trends in the financial marketplace or financial structure often can impact traders’ ability to meet their goals. Changes to instrument liquidity and bid/ask spreads can make a dramatic change to a trader's bottom line. Competitive product releases, particularly in the exchange-traded funds (ETF) community in recent years, while allowing a supermarket of trading choices, have also have resulted in increased liquidity of some products. Traders who claim to be experts in one product expose themselves to a learning curve risk when forced to learn to trade new products.

Political, Legislative, and Juridical Risks

Legal changes and government interpretation of policies and laws can have an impact on the ability to trade and even directly to a trader's bottom line. A “trader tax” has been in discussion for many years now and has increased in the spotlight since the economic crisis of 2008 and the emergence of national debt reduction ideas floating around in the legislature. One proposal called for a small tax on each trading transaction. Although it would be just a few pennies per trade, many ...