Risk Control

Every trading style has losing streaks that will ruin an investor who begins trading at the wrong time or is undercapitalized; therefore, the size of the position, the markets to trade, and when to increase or decrease leverage become important for financial survival. Some risks, called systematic risk, can be controlled or reduced while market risk, which can take the form of a price shock, can never be eliminated.

This chapter covers a broad range of topics related to risk, including individual trade risk, collective risk, leverage, and a continuation of the effects of price shocks and catastrophic risk. It is not possible to say that one is more important than another. In a specific situation, any one of the areas discussed may be the answer to preventing a substantial loss. The first part of this chapter discusses capitalization and shows why many traders are successful for months and then lose everything in only a few days. It explains the choices in dynamic leveraging and offers alternatives of less risk. Profit-taking and stops, the two most common ways to control risk, are shown to apply to specific types of trading, rather than used as a generalized solution. The last section tries to distinguish between a system that is temporarily performing properly and when it has failed to live up to expectations of it.


Embracing risk is more important than measuring risk. Understanding and accepting each day's losses and series of ...

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