3 Different Types of Risk Management Strategies

Joseph Herrera June 5, 2018 Comments Off on 3 Different Types of Risk Management Strategies
3 Different Types of Risk Management Strategies

The market offers not only great rewards; it also offers great risks. And it’s a age-old knowledge that if you want to achieve something great—like huge profits from the financial markets—you often have to go toe-to-toe with something unpleasant and at times destructive.

The same Meta Trader 4 logic applies to the market. You cannot expect to be the next Warren Buffett of the stock market if you’re not willing to take some risks and possibly manage them.

If you know how to identify, treat, and monitor the risks, you’re already one step closer to being an excellent risk manager.

The following are some of the Funding Methods ways investors treat risks. Read on and you might stumble upon the best strategy you can use for your trades and investments.

Avoidance

As the name suggests, some investors choose to fight risks by completely avoiding it. It’s just like trying to be invisible to the eyes of your school’s resident bully. As much as possible, you want to try and get out of his way because you don’t want to be beaten up.

Investors do this by selecting which risks they want to avoid, and then uprooting the cause of that risk. They uproot the cause by not investing in that security.

If they don’t want to face the risks of interest rates, they would stay clear of the forex market. If they want to avoid the risks of volatility, they’d stick to fixed-income securities.

Usually, this one’s a last resort. When the risks are too high, or if your risk tolerance is quite low, this one’s a practical strategy.

Mitigation

This strategy tells us that we can circumvent risks by minimizing its effect through some clever ways. Instead of avoiding it, we take it, and we try to fix the risk before it even occurs.

Imagine again that you have your favourite resident bully in your school, and you know that he’s going to find you sooner than later. What you do is minimize the risk by maybe sticking with your other friends who you know wouldn’t flee and leave you alone with the bully.

For a more solid example, imagine an app developer mitigating the risk by releasing several versions of the application before releasing the final product. He does it that way so that he can find the problems that will likely occur within the app even before he finishes or gives the final touch to the app.

Acceptance

Now imagine that you’re on your own and the bully has already spotted you. And behind you is tall, solid fence.

Acceptance is when you know that you can’t run away from the risk. If you really want to make that investment, you’ll probably accept the risk. You may do this in two ways.

First, you can try passive acceptance, in which you do nothing about the risk (since there’s practically no way out of it) and just document what happens before, during, and after the beating-up takes place. You can use the data you gather once the storm passes to avoid being caught up with the risk again.

Second, you can try active acceptance, in which you try to fight the risks as much as you can. While it’s beating you up, you try to cover your face and maybe be alert if some chances of escape presents itself.

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