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Trading carries a high level of risk, and may not be suitable for all investors. You should never invest money that you cannot afford to lose.

Risk Management explained

 

It is well known that most people confuse uncertainity with risk, that's why they do not care about exposure. Controlling the exposure it is the ultimate tool of risk management
  • Uncertaintity (future events) - The future is uncertain, and it will always be, especially when it comes to what will be the social/economic outcome of some event. In general, nobody has a crystal ball, nobody knows the future and guessing it is a sure loser game. Never try to predict the future, just expect, there are events more or less expected, and unexpected usually happens.
  • Exposure (present actions) - Your exposure to uncertain events is something that you can control (at least in relative terms, i.e. more exposure, less exposure), while you cannot remove the uncertainity so focus on what you can control.
  • Rewards (past events) - Actually you do not want to remove the uncertainity. You just want to increase your exposure when the outcome is positive.
  • Negative outcome (past events) -
As you may noticed, a decision block is missing from the previous figure. As you can see in the next picture, the decision affects only the exposure and has noting to do with the uncertainity. Of course, the decisions are taken based on a quantitative model, that's why we have a science called statistics.


Exposure is controlled via several components of your strategy. One of them is the Risk Profile Function

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Trading carries a high level of risk, and may not be suitable for all investors. You should never invest money that you cannot afford to lose.

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Trading carries a high level of risk, and may not be suitable for all investors. You should never invest money that you cannot afford to lose.