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The Risk of Trading: Mastering the Most Important Element in Financial Speculation

Book Description

Develop the skills to manage risk in the high-stakes world of financial speculation

The Risk of Trading is a practical resource that takes an in-depth look at one of the most challenging factors of trading—risk management. The book puts a magnifying glass on the issue of risk, something that every trader needs to understand in order to be successful.

Most traders look at risk in terms of a "stop-loss" that enables them to exit a losing trade quickly. In The Risk of Trading, Michael Toma explains that risk is ever-present in every aspect of trading and advocates that traders adopt a more comprehensive view of risk that encompasses the strategic trading plan, account size, drawdowns, maximum possible losses, psychological capital, and crisis management.

  • Shows how to conduct a detailed statistical analysis of an individual's trading methodology through back-testing and real-time results so as to identify when the methodology may be breaking down in actual trading

  • Reveals why traders should think of themselves as project managers who are strategically managing risk

  • The book is based on the author's unique 'focus on the risk' approach to trading using data-driven risk statistical analytics

  • Using this book as a guide, traders can operate more as business managers and learn how to avoid market-busting losses while achieving consistently good results.

    Table of Contents

    1. Cover
    2. Series
    3. Title Page
    4. Copyright
    5. Preface
      1. WHY USE A DATA-DRIVEN APPROACH?
      2. THERE WILL ALWAYS BE RISK
      3. A BUILDING-BLOCK APPROACH
    6. Acknowledgments
    7. About the Author
    8. Part I: Principles of Risk Management
      1. Chapter 1: Foundations of Risk Management
        1. A BRIEF HISTORY OF THE LEGISLATION
        2. DEFINING RISK AND RISK MANAGEMENT
        3. CLASSES OF RISK
        4. SUMMARY
      2. Chapter 2: Five Steps in the Risk Management Process
        1. OVERVIEW
        2. STEP ONE: RISK IDENTIFICATION
        3. STEP TWO: RISK ASSESSMENT
        4. STEP THREE: RISK CONTROL
        5. STEP FOUR: MEASURING RISK
        6. STEP FIVE: MONITORING YOUR RISK PROGRAM
        7. SUMMARY
    9. Part II: Managing and Measuring Risk
      1. Chapter 3: Predictive Analytics Using Quantitative Analysis
        1. WHAT IS QUANTITATIVE ANALYSIS?
        2. THE DATA-DRIVEN RISK MANAGER
      2. Chapter 4: Statistical Edge and Its Impact on Risk
        1. FINDING EDGE
        2. REDUCING VARIABILITY IN EMPIRICAL PROBABILITY
        3. CRITERIA FOR DETERMINING EDGE
        4. OBTAINING A VALID SAMPLE SIZE
        5. PROBABLE EDGE VS. POSSIBLE EDGE
        6. CHALLENGES WITH CONFIRMATION BIAS
        7. INDICATORS THAT DETECT EDGE
        8. LEVERAGING EDGE USING CONFLUENCE
        9. SUMMARY
      3. Chapter 5: Embracing a Culture of Analytics
        1. RISK MANAGEMENT RULES FOR THE TRADER
        2. THE DATA COLLECTION PROCESS
        3. DATA ASSESSMENT
        4. BASIC PRINCIPLES OF MEASURING DATA
        5. PERFORMANCE MANAGEMENT: WHAT IS THE DATA TELLING ME?
        6. DEVELOPING A TRADE JOURNAL
        7. MEASURING SUCCESS THROUGH A KPI
        8. TRADE REVIEW AND REPORTING ETHICS
        9. BENCHMARKING
    10. Part III: Qualitative Elements of Risk
      1. Chapter 6: The Human Element: Psychological Risks of Trading
        1. LOSS AVERSION
        2. THE RISK OF REGRET
        3. INTUITION TRADING
        4. THE SUCCESS FORMULA AND DISCIPLINE
        5. RISK ACCEPTANCE
        6. MASTERING INCREASES IN SHARE SIZE
        7. THE GRADUATION PLAN
        8. SUMMARY
      2. Chapter 7: Preparing for Risk and Loss
        1. MASTERING RISK DURING A TRADE
        2. THE NEED FOR PLAN COMPLIANCE
        3. RISK PARTICIPATION AND LOSS ACCEPTANCE
        4. PROCESS OF PREDEFINING RISK
        5. TRADER EXPECTATIONS
        6. BUILDING YOUR RISK TOLERANCE
        7. POSSIBLE LOSS VS. PROBABLE LOSS
        8. KNOWING YOUR RISK APPETITE
        9. SUMMARY
      3. Chapter 8: Business Risk Management for Traders
        1. THE FIVE STEPS OF CRISIS MANAGEMENT
        2. SCENARIO PLANNING AND TESTING
        3. RESTORATION REQUIREMENTS
        4. BUSINESS IMPACT ANALYSIS
        5. VENDOR RISKS
        6. PARTNERSHIP RISKS
        7. SUPPORT RISKS
        8. PERSONAL RISKS
        9. CREATING A DEVELOPMENT PLAN
        10. SUMMARY
    11. Bibliography
    12. Index