Investor Risk Management Notes

May 6, 2006
A wise investor is always looking for ways to avoid losses. Risk is part of investing. Prevention of losses is called "Risk Management". Due to the financial markets record highs and current volitity in both the precious metals and energies sectors, as well as, base metals, I strongly suggest that you read the risk management article posted below to help insulate your investments. The article is well written and covers basic technical information that every investor should consider.

Friday, May 05, 2006
by Fernando Gonzalez
Free-Market News Network Trading Specialists

Any trader who knows his salt will tell you that Risk Management is the single most important aspect in trading, regardless of style or technical strategy. Yet, most traders are really not able to define what "Risk Management" really is.

Let's pause for a moment, and think: can we define, in one brief sentence, what Risk Management is? "Loss control" would probably be the best broad definition, but to me this is a little more precise: In the business of trading the financial markets, Risk Management is the constant modulation of Risk Exposure to a constantly changing market. What is this exactly?

Most participants will relegate their entire Risk Management strategy to setting and adhering to "stop losses." But this falls far short of what Risk Management really is. To relegate the entire Risk Management strategy down to simple stop losses would be equivalent to saying "I am safe in my car because I have brakes." Needless to say, the "brakes" are only part of an entire system of managing risk in a constantly moving environment such as street traffic. In this sense, the markets are the same as the streets.

There are far more actions we can take to minimize risk besides the brakes: there is steering, controlling the throttle, the path you take, "your trip preparation," mapping your route, the times you drive, the amount of driving you do, not driving while "under the influence," there are so many factors that affect risk levels, that we cannot possibly reduce the entire risk control strategy down to "brakes," or in the case of trading, "stop losses."

So what do we mean by "modulation of Risk Exposure?" How we make and lose money is the end result of our interaction with the market. If we do not interact, we neither win nor lose. If we interact too much, we assume higher levels of risk that may be "more than we can handle."

Risk Management is the constant "adjustment" of our Risk Exposure based upon two primary factors: market conditions and, more importantly, our very own performance.

How do we modulate or "adjust" our Risk Exposure?
There are 3 primary ways of modulating exposure:

SIZE: How large or small our positions are, based on our account values. The more we expose our account, the "larger" the exposure.

FREQUENCY: How often we are in-and-out of the market. The more frequently we trade, the more we are exposed to the markets' motions over time, the more risk we assume. Also, commission costs become a factor that significantly affects risk levels as we increase frequency.

DURATION: The longer we are in each trade, the more opportunity the market has to travel, the higher our risks will be....

Read the entire article at Free-Market News Network:
http://www.freemarketnews.com/Analysis/46/4786/2006-05-05.asp?nid=4786&wid=46