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3 pips
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While many novices focus largely on trading risks, another important type of risk traders need to evaluate when reviewing their trading activities is business risk. This can be defined as the risk that your business will fail to have enough funds to cover its costs.
Forex traders need to be just as vigilant about managing business risk as they are about making trading gains since it involves doing what is necessary to stay in the trading business long term. This often means taking a closer look at your trading process from a risk versus reward perspective.
Business Risk/Reward Analysis
Performing a risk/reward analysis usually involves taking a reasonably objective assessment in terms of size, timing and likelihood of any risks the business might encounter. It also involves considering what sort of rewards can reasonably be expected to result from your trading activities and to what size and over what time frame you project them to accumulate.
Also, since some risks are more probable than others, they can be weighted in a risk analysis according to their probability of occurrence, and then multiplied by the potential size of risk or loss involved.
Assessing Business Risk
Specific examples of business risks which traders can encounter, organized in two basic risk categories, appear below.
Financial Risks:
- Losing more money trading than you can afford to.
- Displeasing your employer, domestic or business partner by spending time engaged in forex trading, and who then insist that you stop trading.
- Inadequate or negative returns from your trading activities that induces your investors or partners to withdraw their financial backing from your trading business.
- Having margin calls in excess of your ability to cover them due to an unfavorable market movement.
- Needing to pay interest on trading loans in excess of you can afford.
Economic Risks:
- You can no longer trade because new regulations exclude you.
- Trading amounts, spreads or fees exceed what you need to continue to trade profitably.
- The tax code changes in a way that negatively impacts your trading business.
- You are unable to obtain items needed for your success due to insufficient funds or education. For traders,
such things might include:- Forex Trading platforms.
- Technical analysis systems.
- Account management facilities.
- Access to live news and quotes.
- Forex mentoring.
- Courses on trading, technical analysis and money management techniques.
Advantages of Business Risk Analysis
Assessing business risk by considering what financial and economic risks your trading business might face, in addition to performing a quantified risk/reward analysis is well worth doing and could make the difference between success and failure as a trader. Also, such a risk analysis can be added to your trading business plan to increase its scope and broaden its perspective both for yourself and for any potential investors you might hope to attract.
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