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Risk Management Trading

To manage something is to understand and control it. To manage the risk

one must understand and control it. One will have a difficult time trying to 

manage the risks that one does not understand. Once, one understands the 

risk, one can now try to manage it. However, One can understand the risk, 

but one may not be able to manage it. Here, the word manage means having 

the ability, time and resources to contain what one is trying to manage.

Understanding Risk And Risk Management

The risk is the opposite goal (or reaction) to an initial goal (action). Risk is 

also the product of threat and vulnerability. Indeed if one is vulnerable and 

faces a serious threat, one is under a high risk. A trader that is not well 

equipped that enters a volatile or challenging market is a high risk taker. He 

or she will be al right or come out unscathed if he or she manages to reduce 

the risk. The lesser the risk or better one is equipped in the financial markets, 

the more likely one will get something out of the markets. Generally, in trading 

the goal is to make profit. The opposite goal is to make losses. For a technical 

trader, the aim is to time the financial markets profitably, but the reaction to 

that goal is not to time the markets accurately or profitably as one wants. For 

a fundamental trader, the goal is to buy undervalued and promising financial 

securities and sell them profitably at a higher price.
The opposing goal or reaction would be to buy distorted priced securities 

(or overbought) at the wrong time, and being forced to sell them at loss.

Whether one is an investor, trader or speculator, one must understand the risk.
Even if one is using the most sophisticated trading tool, one must carry out a 

full risk assessment before hitting the buy or sell button. Usually, less prudent 

market participants get carried away, or let their guards down (when they think 

that it is all well) just before they wipe out their trading account or investment 

funds. It does not matter whether one is a day, swing, position trader or investor, 

it is paramount to be defensive, and apply a robust risk management.

For a day or swing trader, every trade involves a risk management or control. To 

understand the risk, one must ask specific but relevant questions.

1/ How much profit does the trade offer (ultimate profit and midpoint profit)?
2/ How much does it cost to purchase or sell the financial instrument?
3/ What is the maximum loss one can incur?
What is the minimum loss one can accept (risk tolerance)?
4/ How volatile is the financial instrument?
5/ Is it a speculative trade?
6/ Which factors can increase the risk?

Those questions will help one to understand the risk, and be prepared to 

implement a better risk management.  Evidently, it is not sufficient to ask those

questions, but one wants to get the correct answers that will help to mitigate 

the risk at hand. Once one has a clear understanding of the risk attached, the 

next step is to control or manage the risk.

Managing The Risk

To manage the risk one must answer the following questions:

1/ Which trading tool is best suited to control the risk? Use only those tools.
Should I buy and hold?
Should I use put or call options?
Should I use CFD or spread betting?

2/ What skills and experience are needed to control or manage the risk? Get 

the skills and experience first before trading the financial asset. An incompetent 

or amateur market participant will not manage the risk attached to the asset he 

or she is trading.
3/ Has one got enough time to control the risk?
Time is a valuable asset for a person that wants to control or manage the risk. 

Therefore, if one does not have enough time, one is under pressure, it would be 

prudent to stay out. Sometimes, one may have everything that is required to 

control the risk except the time to implement the risk control. Time is a valuable 

resource for a successful risks management in the financial markets whether one 

is trading or investing.

3/ How to avoid the risk if possible?
Truly, the best way to control other risks is to avoid them. Instead of plunging 

oneself into a risky trade or investment, one can just take cover or avoid it. Just 

avoiding too risky investment is a wise thing to do in many cases.
For example a professional trader may avoid trading the first eight days of the 

month due to high volatility in the markets.

4/ Which strategy will help to reduce the risk?

Reducing the risk should be the first priority of all active financial market participants. 

Instead of aiming first for a maximum profit, one will avoid maximum losses if only 

one aims to reduce the risk. Indeed, traders who do care about reducing the risk will 

focus on high probability trades. They will avoid useless investment.
They will also avoid distorted price-action that occurs when the market environment 

is too risky.

5/ How much resources are needed to manage the risk?

One needs enough resources (money, software, third party services) to manage the risk.
Sometimes, one will be better off not taking part in any trade or investment proposition 

that one could not control due to a lack of adequate resources. For a trader, it may be just 

one does not have enough money to support the trade or one does not want to set a bigger 

stop-loss needed to protect the trade.

The subject of risk management is a big issue in the financial markets. Though, big financial 

institutions such as hedge funds and investment banks do spend more time and resources to 

mitigate the risks, most technical traders do not bother to do anything about the risk 

management

 It is a shame that many financial market participants do lose just because they care less about 

reducing the risk, and aim instead of maximizing the gains. Surely, the first objective should be 

to reduce the risk. The goal to maximize profit should come second after the risk management 

plan.

Truly, one will never come across a profitable trader or investor that does not aim first to manage 

the risks.  Those that get something out the financial markets are those that aim to put in place a 

robust risk management at every level.

Question And Answers

1/ What is a risk?
2/ What are the questions that help one to understand the risk?
3/ what are the questions that help one to manage the risk?
4/ Why time is an essential element for managing risks in the financial markets.
5/ why is it important that one understands the risk before trying to control or manage it.
6/ What trading or investing tools can one use to manage the risks.
7/ What is a distorted priced asset?
8/ Why a distorted financial market is a risky one?
9/ Why the goal to maximize profit should be second to the goal to reduce losses?
10/ Tell us a time when you
have successfully managed risk in the financial markets.
11/ Tell us another time when you did not control the risks in the financial markets.
12/ What is a risk-reward ratio?
13/ How to reduce risks?
Give two examples.
14/ What risk tolerance?
15/ What is the advantage of using call or put options instead of spread betting?
16/ what are the advantages and disadvantages of using CFD?
17/ What is a stop-loss?
18/ What are the advantages of using a limit order instead of market order?
19/
How technical traders use limit orders to reduce the risks?
20/ Risk is a likelihood of loss. Yes or No?
21/ Threat is an outside force that can compromise your profit. Yes or No.
22/ What is the difference between risk assessment and risk management?
23/ What is risk mitigation?
24/ What is a due diligence?
25/ Why traders who trade very well still end up losing in the financial markets?
26/ what is hedging?
27/ Give an example of how Forex trader could hedge EURUSD position?
28/ How traders use stop loss to reduce risks?
29/ Give two examples of risk in the financial markets when you would rather avoid the risk altogether, and wait until market environment becomes less riskier.
30/ Write down ten things that you could do to begin a risk management in your trading or investing.
31/ What is the meaning of management and control?
32/ To control something is to be able stop, reduce and expand it at will in any condition. Agree or disagree?