Weekly Perspectives: A Crazy Little Thing Called Risk 😨

trading May 29, 2017


It’s often the 800 lb. gorilla in the room.

The topic we traders mention constantly but more times than not we would rather discuss our dental visit than divulge our risk management plans.

Most traders appreciate the importance of risk management however where educators often fall short is in the scoping of risk management. Bottom line; most traders focus on just stop management and protecting trade loss.

One approach that I find gains more traction is to have the trader take an ‘enterprise’ risk management path to understanding risk and its application to trading.

The concept of ERM takes more of a holistic improvement approach to the topic and in essence widens the sandbox to what traders need to consider under the risk management umbrella. Core ERM plans should address both profitability as well as loss management.

The best way I have found for traders to grasp ERM and to buy into the value it offers is with this simple statement:

You will have better results if you apply this holistic risk management approach.  For traders, this can ultimately be measured in two ways: greater profitability and sustainability.  

So what’s the quickie lesson on how to do this?  You got the stop thing going, right? So what else?  

Answering the following questions are the initial steps towards identifying potential threats and coming up a solid business plan to address and mitigate them.

I hope the following questions will help you widen your sandbox around risk management. So, here we go.

  1. My risk plan addresses stop loss management. What’s your approach? Do you use bracketed or ‘OCO’ orders on your trades? Do I know how to properly assess where my stops should be?
  2. How does my plan address daily stop limits or other ‘bad day’ risk management?  Does my broker have a daily freeze feature I can use?
  3. Do I understand the technological tools available to me to help improve and comply with my risk management strategies and what actions should I take to get there?
  4. Are my loss control rules more defined than my profit taking rules?
  5. Have I addressed the other issues that affect my trading such as sustainability and consistency?
  6. What are the threats to my business other than losses? Do I have a process in which to address them?
  7. Do I have a plan to deal with trading slumps and do I have action plans to manage them?
  8. Am I investing the time and of time I need to make myself a better performer?
  9. Am I using that time to my best efficiency?
  10. Am I still learning from my past lessons learned?
  11. Trading full time? How are they impacted by my developmental growing pains?   

But one thing you might ask is, how does trading psychology differ from my risk plan?  

Let me pose to you this question.  Does my ability to stay on top of my mental game affect my profitability and sustainability as a trader?  Of course, it does so any potential threats should be identified with the enterprise risk framework.

As you can see, these scoping questions can bring to light an overflow of elements to throw into your risk management plans.

Hopefully, I hit a nerve with some of them and will spark the discussion with you or your coach. I’ve seen many fail in this business and can say that stop loss management falls somewhere in the middle of the risk severity matrix.

Simply put; identify your challenges, assess the impact they have on your trading, and develop action plans for all on the list.

The goal with any development plan is progress, not completion.

All the best with your trading and enjoy your new big summer sandbox.  


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