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

PRAISE FOR THE RISK OF TRADING

"For many traders, risk management is simply guessing at where to set a stop–loss order to protect their accounts from catastrophic loss. The Risk of Trading finally gives traders an objective, data–driven method to identify risk and then control and protect every trade against it. Follow the trading rules you′ll find in this book and you′ll put yourself on the path to success and long–term wealth as a trader. The Risk of Trading is required reading for every trader who wants to protect and grow their trading account."
TIM BOURQUIN, TraderInterviews.com

"While some traders consider a stop–loss a sufficient risk–management strategy, Michael Toma expands the topic of risk far beyond stop–losses by clearly explaining comprehensive methods to classify and control the many different risks traders face. Drawing from research and personal experience, The Risk of Trading provides both at–home and professional traders a step–by–step blueprint to create customized strategies to enhance risk management and maximize edge–based trading opportunities."
COREY ROSENBLOOM, CMT, author of The Complete Trading Courseand President of Afraid to Trade

"I have seen many casualties come and go in this business. Mike has excelled at giving every trader a head start to success in his detailed approach to understanding the critical risk factor."
RICK VINECKI, Beyond Profile Trading Room

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

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.