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

SUMMARY

The preceding section discussed the foundation principles of risk management and how it can be applied in trading. The framework of these principles is the five-step process involved in managing risk: identification, assessment, control, measuring, and monitoring of trading risks and the risks inherent in the trading profession. If you understand and put into practice this process, you are well on your way to becoming a better trader. We also discussed the different types of risks and exposures that you are likely to be confronted with. Remember that focusing only on specific risk of loss on a trade is undermining your exposure in trading. You should consider risk in a much broader or enterprise scope.

Since the identification process is the most important step in the risk management process, be sure to know the different methods of identifying your specific areas that not only subject you to loss but prevent you from being at the top of your game. Sources used to identify developmental areas may be found in your trading plan, trade journal, and from review findings completed during the assessment process. Furthermore, you should have a good base of knowledge on constructing your trading plan, an essential piece of framework that statistically improves your chances of success. Before actual trading, you should know the common components of a trading plan and be able to develop rules and filters that should be implemented in a live trading environment.

Determining the potential ...