Understanding risk
The four types of risk
4 min
Risk is not one thing. Naming its forms lets you manage each one deliberately instead of being surprised by it.
Market risk
The risk that prices move against you. This is the one traders think of first: you are long EUR/USD and it falls, you hold a stock and it drops on bad earnings. Market risk is unavoidable — it is the price of seeking a return — but it is the one you control most directly, through position size and stops.
Credit risk
The risk that a counterparty fails to pay what it owes you. For a trader this is mostly broker risk: if your broker becomes insolvent, can you get your money back? It is why regulation and segregated client accounts matter so much. It also appears in bonds (the issuer defaults) and in any instrument where someone owes you on the other side.
Liquidity risk
The risk that you cannot exit at a fair price when you want to. In a thin market — an exotic pair at 3am, a small-cap stock, a crisis when everyone sells at once — the price you see is not the price you get. Spreads blow out, stops fill far past their level (slippage), and an "obvious" exit becomes expensive. Liquidity is plentiful right up until the moment you need it most.
Operational risk
The risk of loss from failures in process or systems rather than the market itself: a platform outage during a fast move, a fat-finger order ten times too large, a lost internet connection, a misread of which account you are trading. It sounds mundane, but operational mistakes have ended careers as surely as bad trades. Checklists, alerts and good habits are its defence.
This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.