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

ISBN: 978-1-118-10083-7
208 pages
April 2012
The Risk of Trading: Mastering the Most Important Element in Financial Speculation (1118100832) cover image
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.

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Preface vii

Acknowledgments xiii

About the Author xv

PART I Principles of Risk Management 1

CHAPTER 1 Foundations of Risk Management 3

CHAPTER 2 Five Steps in the Risk Management Process 11

PART II Managing and Measuring Risk 61

CHAPTER 3 Predictive Analytics Using Quantitative Analysis 63

CHAPTER 4 Statistical Edge and Its Impact on Risk 71

CHAPTER 5 Embracing a Culture of Analytics 113

PART III Qualitative Elements of Risk 145

CHAPTER 6 The Human Element: Psychological Risks of Trading 147

CHAPTER 7 Preparing for Risk and Loss 161

CHAPTER 8 Business Risk Management for Traders 181

Bibliography 201

Index 203

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MICHAEL TOMA, CRM, is a corporate risk manager and specialist in trading the equity index and futures markets in the United States. A Certified Risk Manager, Toma is a frequent speaker on the industry trading conference circuit. His first book, Trading with Confluence, released in 2010, provides a first-hand perspective of risk-based trading and the challenges that new traders are forced to overcome. In addition to managing his own international risk management consulting firm, he is an active member of several risk management organizations and research academies that promote corporate ethics and risk management educational programs.

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"The Risk of Trading is a call to arms for the trader who either keeps no trading journal at all or simply records profit and loss. Metrics are critical to success." (Seeking Alpha, May 2012)
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