Total Risk

Today, we are going to delve into an important trading term that every trader should be familiar with. Understanding 'Total Risk' can significantly impact your trading decisions and profit margins.

What is Total Risk?

The term 'Total Risk' in the context of trading refers to the cumulative or overall risk associated with an investment, trading strategy, or an entire portfolio. It combines both systematic (unavoidable) risk and unsystematic (specific or avoidable) risk. It takes into account elements such as market volatility, potential changes in exchange rates, liquidity risks or specific business risks related to a particular commodity or company.

Why is Total Risk Important in Trading?

Understanding 'Total Risk' is very important in trading as it provides a complete picture of the potential losses one could face. By evaluating the total risk, a trader can make informed decisions on whether to proceed with the trade or consider other investments. This assessment builds the foundation of risk management strategies in trading, enabling a trader to balance potential gains against possible losses.

How to Calculate Total Risk?

'Total Risk' is usually calculated as the standard deviation of the returns on an investment. This involves measuring the rate of return on an investment and tracking how much these returns deviate from the average return. A higher standard deviation indicates a higher total risk. However, keep in mind that the nature of markets can sometimes make numerical risk prediction imprecise.

How to Manage Total Risk?

Managing 'Total Risk' is critical in trading. Traders normally manage total risk by diversifying their investments spread across different categories of assets. This is known as portfolio diversification. Moreover, having a well-defined trading plan and sticking to its principles is another effective way to manage total risk. Regular market analysis and reviews of trading strategies also help to keep the total risk under control.

In conclusion, understanding and managing 'Total Risk' is a cornerstone of successful trading. It empowers traders to make informed decisions, and is crucial for managing potential losses and maximizing profit.