Risk Assessment

"The professional trader predetermines
the size of risk he is prepared to take."

Achieving his personal goals for risk/return is the sole purpose of the trader's system.

The actual process of putting a figure on the size of risk is called 'determining the risk resonance' of the system. Every system has a different resonance and the trader's evaluation method is designed to find it.

Why is the size of risk so important?

If the risk is too large it means that the amount being staked on a trade is too great a proportion of the trader's equity capital.

Traders need to understand that the size of any potential gain ‘on offer’ does not excuse overtrading. If you lose your trading capital you can no longer take advantage of potential gains.

Use of sound trading methods is the way new traders should ensure they get the important things right (and there are quite a number of things to get right).

Professional system traders have developed methods of best practice over a long period of time and they follow them closely. Within this framework, there is still plenty of room for them to develop their own ideas and exercise their individuality.

These experienced traders realize it is foolhardy to ignore what has already been shown to be best practice.

The size of risk a trader is prepared to take is a very individual matter. How far towards 'the edge' is he prepared to go in search of greater return?

The answer depends entirely on his character. The rest of the 'trading challenge' is how to reflect that character in his system and how to test the capability of that system to produce a satisfactory return within the risk limit.

Ultimately a systems trader must feel that he can happily leave the day to day trading of his chosen system to his computer.

The professional trader certainly does predetermine the size of risk he is prepared to take - and so should every trader.

 

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Copyright David Bromley 2006
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