Tag Archives: Business Risk

Have You Ever Thought to Protect Against These Trading Risks?

When we talk trading risk, most people only ever think about individual trade losses. They rarely ever put any consideration to external risks, that can be just as damaging to your trading business profit & loss.

The following is a great email I’ve received from YTC reader Adam, who kindly gave permission to share his experience…

EMAIL:

Hi Lance,

Just thought I’d ask whether you’d put together anything like this for yourself. After reading YTC PAT and knowing your affinity for process and procedures, I figure you might.

I am now planning on putting together a log to go with my trading plan which will list the main sources of external risk to my trading career, outside of the trading, obviously.

Last night a neighbour knocked at my door and told me 2 guys had just tried to open my window from the street. That’s the window to my office and now that the nights are drawing in (here in the northern hemisphere) I had my desk light on but I hadn’t closed my curtains – this is on the ground floor at street level so my laptop was lit up like in a shop window and I’d gone off to do something else. Fortunately the would-be thieves failed to get the window open (it’s pretty stiff, fortunately) but I could have lost my trading machine.

The experience made me mad for a while but then I realised, it’s my own fault for being so careless. I thought, what else am I risking like this? I’m not the type who likes insurance and even if you have it, often the insurance companies don’t pay out – like in my situation maybe. So I need a financial buffer.

It means I have to put together a log of all these external risks along with:

  1. an estimate of how much it will cost to re-establish afterwards
  2. how long it will take to get back on track
  3. any precautionary measures I need to put in place now

Here’s my basic external risk list that I’m going to work with:

  • Laptop – fire, theft, breakage
  • Internet connection – e.g. if my local telephone exchange burns down
  • Base currency devaluation (GBP)
  • Health – accident or illness
  • Partner’s health – accident or illness or unemployment giving me the burden of her income
  • Child’s health – too ill to go to nursery = costs for a nanny
  • House – fire, flooding, etc

There are probably a few major points that are missing but that’s what I’m working with at the moment.

There you go. Maybe you’ll find it interesting, maybe you have it already. I’d be very interested to hear.

Best regards,

Adam

REPLY:

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Business Risk Management – Rule of Three

Would you like to discover a quick and simple risk management strategy that is easy to apply to any trading plan, and has the potential to vastly improve results? Excellent!

I’m not talking about the placement of stop losses, which is what most people consider as ‘risk management’. Rather, this is a simple tool for managing the risk in your trading business.

Effective trading requires focus and discipline. There are many external factors that can interrupt your focus, and destroy your discipline, such as:

  • An unreliable internet connection
  • Your charting platform losing its signal
  • A knock at the door
  • The telephone ringing
  • A baby crying
  • Hunger
  • Noticeably too hot or cold
  • Fatigue (hopefully from late night trading study, rather than alcohol and party induced fatigue)

 

And as if that’s not enough, there are many internal factors that can also interrupt your focus, and destroy your discipline, leading you to make decisions and actions based on emotion, rather than following your documented trading plan. You’ve no doubt experienced some of these already. The internal factors would include things such as:

  • Hesitation in entering once price triggers an entry
  • Hesitation in exiting when price hits your stop loss
  • Doubt about your entry after entering the trade
  • Fear of exiting at your stop loss
  • Worry about how you will explain another loss to your partner
  • Any thought about an early exit of this trade, just to make up for earlier losses

 

There’s a whole lot more, but hopefully you get the point.

One flaw in many trading plans is the absence of a valid strategy for managing these risks. So, let’s fix that situation.

The problem is, traders have no guidelines as to:

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