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

THE DATA-DRIVEN RISK MANAGER

Successful traders or those seeking success make business and trading decision that in their view will lead them to their expected trading goals. A risk manager's role is no different. We implement a plan using a decision-making process based on knowledge that has historically provided an anticipated result. We forecast what our projected result will be and attempt to execute business decisions to reach those results. Forecasts are nothing more than a projection of a future result. That result can be a trade outcome, a business decision, or an overall business plan goal. Sounds easy, right? But what separates forecasts from actual results? Noise? Distractions? Lack of discipline? Sure, all of the above. These are all immobilizers that prevent anticipated results from occurring. Immobilizers are in essence the brick wall that separates a trader from forecasted results vs. actual results. A primary principle of risk management is that we are surrounded by unpredictability. Things happen; stupidity happens, surprises happen, unforeseen events happen.

The mind-set of a risk manager is to anticipate unpredictability in many forms. We thrive on it as if it is part of a journey. When negative outcomes don't occur, we actually get concerned. During winning streaks when it seems you can do no wrong, traders tend to feel invincible, particularly the novice traders. Their euphoria takes over, and they coin themselves the kings and queens of trading. Risk managers ...