KNOWING YOUR RISK APPETITE
No two traders are truly alike. Your past experiences, upbringing, and ability to handle adversity are all brought to the trading desk and often greatly affect the ultimate outcome. One of those traits is not only our ability to accept risk but thrive on our desire for risk taking. Sadly, some who seek this business as a vehicle to express their desire to take risk often fall into the 90 percent failure statistic. When managed properly, this business contains relatively low risk when compared to other business ventures that include a risk of capital component. Startup costs are reasonably low compared to those of any brick-and-mortar establishment. Ever see the costs in opening a restaurant? Wow, and those dollars are shelled out even before the first customer complaint! Nevertheless, a desire for or at least a minimum acceptance of risk is one of the core competencies for the profession.
How we measure that can be challenging and subjective and is best left to the various risk profiler professional advisors who analyze the psychometrics of hedge fund resumes just as job recruiters validate educational backgrounds.
Risk tolerance is the level of risk that one is willing to accept. “One” can be an individual trader, a prop or hedge fund, or even an institutional financial firm. Having a trading plan that is specifically designed to support each trader's willingness is critical. Any examples of trading plans used in this text are reflective of a trader ...