Risk management is probably the single most important element to
becoming a successful trader. Going into the world of online
trading without an understanding of risk is like driving a car
without any brakes.
Before looking at the individual order types that are generally
available to the retail and professional trader it is important to
first understand the market you are trading and to look at the
potential volatility. Most brokers and market makers now offer
historical charting packages which allow traders to go back over
considerable time scales to gain a better understanding of how your
chosen market moves and the economic releases and policy
announcements that are likely to affect it and potentially increase
the volatility. Only once this study has been completed can you
successfully begin to build a risk model and maximise the use the
risk management tools on offer.
In this section we will take a look at the various risk
management tools that are available through online brokers and
market makers. With the exception of guaranteed stop losses
all of these tools are offered free of charge and so one or more
should be used for each and every trade placed in the market.