Risk Management in Trading & Investing

Everybody talks about the importance of Risk Management. So, what exactly is RISK? To start with, I have very faint idea of how to define RISK at the moment within my trading context. I can only group my RISK into 2 categories: 1) Known Risk. 2) Unknown Risk.

For the Known Risk, there are different ways to handle it and each will depends on the situation. For the Unknown Risk, there is no specific ways to handle it as it is unknown. For me, unknown risk will be group under one item and handle it as one unexpected event based on worst case scenario. In trading, the worst case scenario is to lose everything I have in my account. And my advice to all traders is to always be prepared to lose everything. If you are trading under that pretext, you will not have to worry about any unexpected events.

The rest of the risks which are already known will have a solution to handle it. Each will not be of any worry too. We cannot assume our strategy or theory will always work or even always be able to have an edge. It may turn out that we are having lower probability than 50% chance. The way to handle is to always monitor them.

Some possible events:
1. Complete market crash suddenly
2. Computer Failure
3. Your Broker gone bust
4. Political event
5. Natural disaster
6. War

Either of the event could mean that we cannot take out our money.