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

SUMMARY

Throughout the book, you will notice this holistic or “enterprise” approach toward managing risks as a trader. Historically, this practice focused on loss prevention, and still the term risk management to a trader often means “to lose the least” or “just use stop-loss orders.” If there is one primary objective when reading this text, it is that we will use risk management in a much wider scope. It all starts with understanding the objectives of managing risk as a trader and attaining those objectives using the risk management process. This series of decisions allows all risks to be identified, assessed, controlled, measured, and monitored. Sounds like a handful at first, but in the rest of Part I, we will guide you through each step and allow the process to take immediate effect toward your trading results.

REVIEW QUESTIONS

1. What concept is founded on the principle that patterns or behaviors tend to repeat when similar market elements are present?

2. Define the terms risk management and enterprise risk management.

3. Explain the difference between pure and speculative risk.

4. List and define three classes of risk.

5. Provide an example of how a trader can mitigate political, legislative, or juridical risk.