The Importance of Risk Management in Trading
In our previous blog, we discussed Morgan Housel’s Psychology of Money, which references two different forms of profit: getting wealthy and staying wealthy. Housel believes a combination of frugality and paranoia is key to staying wealthy; here at YellowTunnel we believe in the importance of trading psychology to both accumulate and retain wealth. Statistics and analysis, also key elements of the YellowTunnel platform, offer a good estimate of how a certain stock or symbol can trade but “black swan” events, for example, are nearly impossible to predict. This where risk management and trading psychology are essential.
Risk is inseparable from return. Uncertainty in the market is something all investors deal with. Risk management, in the financial world, is where uncertainty is combated during the decision-making process of investments with the process of identification, analysis, and acceptance or mitigation of these events. Correspondingly, the higher the risk the higher the potential for return. What we are attempting to do is quantify the potential for losses in an investment in order to take the appropriate action (or inaction) to support your portfolio’s return goals and risk tolerance.