Five Most Important Components in Risk Management from Frederic Sealey
It is quite obvious that most of the traders will concentrate on the most potential profits they want in their trading accounts, another important thing to be attentive about is the different losses and risks which can easily take a big bite out of your hard-earned profits. The most important feature of the formulated trading plan is the risk management. This can be very profitable in all kinds of conditions. It is the risks which most of the traders do not understand and these can lead to big losses too says Frederic Sealey. In risk management, there are five most important components. Each one of these components will play an important role and also help the dealer to make huge profits and also control them.
Pillar 1: Limit Orders and Market Entry
In the trading environment, to figure what is the right time to enter in the market can be hard. Even the tools that you can use to find the right cost and time, is limited. With the help of a limit order, you will be able to set a particular level of price, and if there is a chance of the market to touch this level, this will allow a purchase to open or be sold sold accordingly. This can also be much better than the trading of instant prices you will find on the screen as you will be able to set the limit order almost out of the range of trading zone or a preset resistance or support level. This can be set as a cost and if the market is able to reach this level, then there are chances that this will be continuously move in that direction only.
Pillar 2: Market Volatility
The important point to be considered as per Frederic Sealey Consulting is volatility. If there is any extreme price movement this can a big effect by prematurely triggering your limit and then retrace it into the wrong direction. Keep a check if there is a need to make daily announcements regarding the two paired currencies. This is a very good way to figure market volatility. This will not be enough to find the breaking news stories for a particular day, to affect the market, but it can give you an assumption if it is wise to make any anticipations regarding various large movements.
Pillar 3: Market Liquidity
It is true that the market in the entire world is the foreign exchange market, but it is quite possible that you can get trapped and not even have the ability to close the open position you have. If the trade from your end is being done by the maker forex broker which is also giving you a guarantee of liquidity, then this will not be a major factor, as it will be when you are trading on the interbank market or through an ECN agent.
Pillar 4: Stop Loss Orders or Cutting Your Losses
As a trader you will not be willing to humble yourself, before you have dropped any more money and have been able to reduce the losses. To do so, you can also try to set stop-loss orders. For this it is important to use logic and reason both, when you are trying to determine the right level at which you should stop your order. If the stop order is set too short, then there are chances that you will have a premature exit out of the market. This can happen especially when you have chances of heading in the right direction. In case you have set it quite far the chances are of losing a huge amount of money if you do not make the exit.
Pillar 5: Profit Targets and Market Exit
The most important element of the risk management plan is to set the profit targets. This is because you will need to exit the market and that too with maximum number of pips. The move of placing your gain target when you are trading just a lot at a time, can be a straightforward one. This will allow you to just use a retracement level, or you will be able to just set the target below or above. But if you are going to trade multiple lots, and create a situation in which you can exit the market in a sequence, with one lot at a time, then you can also use the strategy of cascading exit order. This should be followed till you liquidate your complete position.