STEP TWO: RISK ASSESSMENT
Now that you have a comprehensive list and ideas of potential items that can go wrong in your trading activities, the next step is to determine if they in fact are an actual exposure and the extent of the issue. In this phase, you truly want to start getting your hands into the mix. Identifying these areas is of little value if they are not evaluated and resolved.
The risk assessment process is handled differently for risks identified from a qualitative analysis method and a quantitative analysis method. Qualitative assessment is the process of reviewing identified risks and exposures that cannot be measured by statistical or financial calculative methods. Generally they are challenging to quantify and thus overlooked in regard to their importance or even impact on one's performance.
Quantitative assessment lends more focus to using statistical analysis in determining impact on identified risks. “Quants” can also assist in predictive modeling such as the financial result of continuing a particular trade setup over a period of time. The power of data cannot be understated. The fast-moving business intelligence sector continues to provide significant value on performance and operational management. These quantitative methods are equally as powerful for the trader when performing risk assessments.
I'm trained to ignore short-term fluctuations.
—Jeffrey Ma, from The House Advantage, Playing the Odds to Win Big in Business
As technology has developed in the ...