Risk. What is Risk?

What is risk? Risk is uncertainty. Risk is opportunity. Risk is often misunderstood. Traders like risk and uncertainty because uncertainty breeds opportunity and trades.

When it comes to financial risk management, we measure price movements (financial risk) and volatility (i.e. standard deviation). We use a simple measure to answer a simple question – “By how much can prices move over a given time period?”

Here is a simple rule for risk assessment. Don’t think in terms of absolutes and averages. Think in terms of levels, trends and scales.  The risk is not that you will get the average or the averaging period wrong. The risk is that you will misread the level/threshold of risk you are facing; that you will misread the change and miss the transition to the next higher level.

 

 

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