SIX TYPES OF RISK TO MANAGE IN TRADING
Trade risk.
The calculated risk you take on each individual trade is adjusted by changing your trade size. This is the only risk you can control. A good rule of thumb is to never risk more than 2 percent of the capital in your trading account on any one trade.
Market risk
.The inherent risk of being in the market is called market risk and we have absolutely no control over this type of risk.
Market risk may cause our carefully calculated trade risk to be much larger than anticipated.
Market risk can be far greater than trade risk.
For this reason it is best that you never trade with more than 10 percent of your net worth.
This type of risk encompasses catastrophic world events and market crashes that create complete paralysis in the markets.
Events causing market gaps in price against your trade are also considered to be market risk.
Margin risk.
This involves risk where you can lose more than the amount in your margined trading account. Because you are leveraged, you then owe the brokerage firm money if the trade goes against you.
Liquidity risk
If there are no buyers when you want to sell, you will experience the inconvenience of liquidity risk.
In addition to the inconvenience, this type of risk can b ecostly when the price is going straight down to zero and you are not able to get out.
Liquidity risk can be caused by or aggravated by a market risk event.
Overnight risk.
For swing/positional traders, overnight risk presents a concern in that what can happen overnight, when the markets are closed, can dramatically impact the value of their position. There is the potential to have a gap open at the opening bell where the price is miles away from where it closed the day before.
This gap possibility can negatively impact your account value.
Volatility risk.
A bumpy market may tend to stop you out of trades repeatedly, creating significant drawdown. Volatility risk occurs when your stop-loss exits are not in alignment with the market and are not able to breathe with current price fluctuations.