Market Risk Methodologies

There are many forms of market risk for investors - real and psychological. There is the risk of not following an investment plan, the risk of following emotions, and the very real risk of not taking a risk.

Risk is many different things to many people. Statistically, it is the probability of a negative outcome and using standard deviation. In other words, it is a measure of volatility. In our world, market risk is the average of a number of analytical technical tools to view market movements, volatility, volume, and market dominance.

Our investment strategies cannot avoid market risk but they can control market risk. Market risk can be measured, and we assign a score to market risk daily. This is not to say we can look into the future and predict when market risk will be in our favor - quite the contrary. But we can use the trending daily market risk scores to determine when market risk is in our favor or not in our favor.

No market moves up every day. Studies clearly show markets move in cycles. Our own analysis indicates that markets are moving in a general up-trend about 50 percent of the time. During that time, the markets are generally in a favorable environment for investors and market risk is manageable. Markets tend to trend sideways about 30 percent of the time.  Finally the markets are in significant decline about 20% of the time and it is during this period that market risk is clearly not in your favor. While market risk is high, this does not mean it is not uncontrollable.

There is no patented answer that provides 100 percent accuracy when measuring risk, just statistical probabilities of success or failure. There are no mechanical signals that work to measure market risk. Mechanical signals will break down at some point. Measuring market risk involves time-consuming daily analysis coupled with disciplines and strategies.

In summary, measuring market risk allows us to understand whether the market remain in our favor or require some type of defensive intervention. It also allows us to understand when the market environment is in transition and the potential direction that market may be moving.