In trading, risks are the ways in which an investment can end up losing you money.
In general, trading strategies focus on weighing up the potential risk of a trade against its potential return. If a trade has greater risk, it should carry the chance of a greater return in order to make that risk worthwhile.
There are two main forms of risk associated with trading:
Market risk, also known as ‘systematic risk’, is the type of risk that can result in losses due to adverse price movements. Market risk affects the entire market and so cannot be avoided through portfolio diversification.
Liquidity risk is the risk that trading an asset may affect its price. This may arise because the asset is illiquid, meaning there are not enough people in the market to trade with. It can also be caused by one of the participants in your trade failing to meet financial obligations.
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