Forex Trading, Mini Accounts, Online Forex Trading System

Although it is only natural for most traders to focus on the potential profits that they are hoping to see in their trading account, it is also important to pay attention to any potential losses or risks that might take a bite out of your profits. Risk management is probably the most important attribute of a fully formulated trading plan that can be profitable in any market conditions, and it is the risks that traders do not know about or think about that can sometimes be the most devastating. There are five main components of a good risk management plan, and each one of these five plays an important role in allowing a trader to earn profits and keep them without giving them back to the market.

Pillar 1: Limit Orders and Market Entry

Figuring out the right time to enter into the market can be difficult in a live trading environment, and one of the tools that can be used to find the right time and price to open a new trading position is a limit order. With a limit order you can set a specific price level, and if the market touches this level then it will open up a buy or sell order accordingly for that currency pair. This is better than trading the immediate prices you see on the screen because you can set your limit order just outside of a range trading zone or an established support or resistance level, and it can be a price where if the market ever reaches this level than it is highly probable that it will continue moving in that direction.

Pillar 2: Market Volatility

Volatility is important to take into account because any extreme price movements or whipsaws can have the effect of triggering your limit order prematurely and then retracing in the wrong direction, or once you are in the market any volatile movements can trigger your stop loss orders prematurely. A good way to anticipate market volatility is to look at an economic calendar and see if any significant announcements are to be made that day for the two currencies in the pair that you are trading. While this obviously cannot take into account any unanticipated breaking news stories for the day that might affect the markets, it can still give you a sense of whether or not to anticipate large rapid movements for the day.

Pillar 3: Market Liquidity

Despite the fact that the foreign exchange market is the largest and most liquid market in the world, it is still possible to get trapped in the market without being able to close your open position. If you are trading with a market maker forex broker that guarantees constant liquidity then this is not as big of a factor as when you are trading with an ECN broker or when you are trading on the true interbank market.

Pillar 4: Stop Loss Orders or Cutting Your Losses

One of the hardest things to do as a trader is to humble yourself and cut your losses before you lose any more money. For this we have the ability to set stop loss orders, and you must use logic and reason when deciding at which level to set your stop order at. If you set your stop order too short then you may need to exit the market prematurely when it was actually going to continue in the right direction, and if you set it too far away then you may lose too much money by not exiting out of a losing position quickly enough.

Pillar 5: Profit Targets and Market Exit

Setting your profit targets is maybe the most important component of your risk management strategy, because you need to exit the market with as many pips as possible without giving any back. If you are trading only one lot at a time then setting your profit target can be pretty straightforward as you can simply use a fibonacci retracement level or you can set your target above or below an established support or resistance level. However if you are trading multiple lots, you may want to use a cascading exit order strategy where you exit out of the market with one lot at a time in sequence until your entire position is liquidated.

Nathan Navachi is a professional trader who built http://TheCurrencyMarkets.com to introduce the world to forex trading.

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