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

STEP THREE: RISK CONTROL

A child goes out in the rain, and Mom tells the child to bring an umbrella. Reluctant to do so, he wanders outside without one (identification) and then comes home with an occasional sneeze. After finding he has a slightly elevated temperature and fever, she keeps him home from school the following day and brings him to the doctor, who determines he has a slight fever (assessment). The doctor's prescription for antibiotic medicine and fever reduction is the risk control used to mitigate the impact of the exposure. Notice how the mother's warning not to go outside with an umbrella and raincoat was a form of risk control, but the child, as many are, was noncompliant and subject to a loss of a school day. Of course, some kids may refer to that as speculative risk resulting in gain. Mom surely thinks otherwise, however, when she receives the bill for the doctor visit.

We now have reached the third step in the risk management process. After using the outlined methods on how to identify potential risks, we then assess these identified risks to determine frequency and severity or the potential impact on the portfolio or trading business as a whole. Until this phase, we have only identified risk and come to the conclusion that action is needed on the exposure. The level of exposure was determined during the assessment phase, and it was deemed worthwhile to put a control mechanism in place. Until now we have not addressed each risk issue or determined how to mitigate ...