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:
- an estimate of how much it will cost to re-establish afterwards
- how long it will take to get back on track
- 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:
Hi Adam,
Great work. Yeah, it does make you mad. But you’re 100% right that it’s your responsibility to plan for any contingency.
See here for an article I had published in the Feb 2009 edition of The Traders Journal magazine: https://www.yourtradingcoach.com/products/published-articles/Traders-TEM.pdf
The editor left out two images, so you can see them here:
- https://www.yourtradingcoach.com/images/stories/articles/figure-1-TEM.jpg
- https://www.yourtradingcoach.com/images/stories/articles/figure-2-TEM-process.jpg
Cheers,
Lance Beggs
Addition – 28 Oct 11:
External Risks – I Would Never Have Thought of This One!
This is a short follow-up to a recent article on external trading risks, as I’ve found another external risk that I would not have thought of in a million years if it had not occurred on Monday night.
I was trading on an HP touchscreen computer. I’ve done that a few times without any problem. However this time I discovered a potential source of risk.
An insect flew into my screen triggering a click on one of my charts.
It was about three centimeters to the left of the chart-trading BUY and SELL single-click buttons.
There was no loss this time… but only through the poor navigational abilities of this insect, that I’m sure harbored desires to be the first insect to trade the e-mini Russell contracts (or maybe even any futures contracts).
Needless to say, this was followed by a quick google search to find out how to disable the touchscreen function.
Life is risk! No matter how much you plan and prepare it seems the Market Gods will find newer and more devious ways to try to separate you from your funds. So, always trade with appropriate position sizes and remain at all times aware of your current exposure.
Lance Beggs