Measuring Risk part 2
When trading, there are many different aspects to managing risk. A good trading plan provides clarity on how much risk to accept in total, and how much to take on any given trade. Keep in mind that choosing winning trades does not necessarily result in overall profitability; traders must ensure that – on average - winning trades run longer than losing trades. By ensuring that you take profits that are greater than your losses, you reduce the ratio of how often you need to be right about a trade. Let’s see how that works in practice in this example.
Measuring Risk part 1
"It is said that chance favors the prepared mind. This is also true for traders, who must balance opportunity with risk management. Risk is measured in several ways. The simplest way is to define a trade size or to calculate the pip value for a given trade. Another is to note the volatility of the asset, that is, how far the price might move and how likely this is. The key is to ensure through fundamental and technical analysis that your trade is more likely to win than to lose. One key insight is that choosing winning trades does not necessarily result in overall profitability.
Introduction to Risk Management
In this short video, we will look at the various kinds of risk that traders encounter. When you invest, there is no guarantee that you will make money. In fact, you might lose money. Therefore, there is risk involved. In response, perceptive traders practice “risk management”, which is the identification, analysis and prioritization of the risk of each trade. Generally speaking, “specific risk” affects only specific assets, for example a single stock, while “systematic risk” affects many assets at a time.
Fundamental Trading Strategies
Fundamental traders attempt to find the true, intrinsic value of whatever they are trading. Once they spot an opportunity, some fundamental traders simply open a position, while others use technical analysis to time the trade. For example, you might look at the traded volume of the stock or currency pair that you plan to trade. Other traders might have insight, or be creating a trend, so checking a two or three week moving average may let you join a spike. In some cases, good or bad news for the stock or currency is followed by an almost predictable reaction that can be traded.
Introduction to Fundamental Analysis
Welcome to fundamental analysis. The fundamental analyst tries to decide what a stock or currency should cost, and compares this to the current market price. This true value of a stock or currency is called the “intrinsic” value.Where technical analysts assume that all information is included in the current market price, fundamental traders believe that focusing on a single stock or currency may provide information that is not yet priced in. Based on this, a fundamental trader will open a position and wait for the market to move to the stock or currency’s true, or intrinsic, price.