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

THERE WILL ALWAYS BE RISK

One of the most popular questions I receive is related to the relationship between risk management and stop-loss orders on a trade. The chapter on risk control deeply penetrates the stop-loss technique as a valid tool in one's risk management arsenal. My biggest concern, however, is the notion that the scope of risk management that protects one's trading account and livelihood, sadly, lies in the use of a simple bracket order feature provided free on a brokerage trading platform. My personal goal with this text is to widen the scope of this topic for traders who believe managing trade risk simply means using stops.

As long as we perform an activity, no matter how much we try to eliminate loss from anything we do, we face the fact that some form of loss could occur. Exposure can strike anyone or any business at any time. Businesses seeking a profit or a charitable organization seeking to provide services with a challenging budget both perform activities that are subject to loss. We perform activities that are subject to a form of loss every day in our lives, and it can interfere with our ability to achieve our desired objectives. As traders, we have ventured into a business where the chance of loss is one of the basic tenets of speculative activity, yet many ultimately find it impossible to accept.

Despite the vast opportunities and possibilities of loss that can occur, the risk management process exists to minimize the frequency and severity of such disruptions ...