How to create a risk management strategy for forex trading

How to create a risk management strategy for forex trading

Whether you're one of the 1.8 million Brits who became traders during the pandemic, you're just getting started or you've been trading on the forex market since its inception in the 1970s, risk management is an essential part of any forex trading strategy.

Without calculating risk, you may find yourself losing more money than you invest, and with the rising cost of living, now is not the time to find yourself out of pocket.

Why is risk management important in forex?

Forex trading is all about making and taking calculated risks. With over six trillion dollars traded daily on the forex market, it's the largest exchange in the world, which means managing your risks is imperative.

Failure to manage and mitigate risks will leave you losing money from your trades, with no way of understanding how it happened, and even less understanding of how to get your money back.

Top strategies to try

Here are some of our top risk management strategies to help you get back on track.

1. Diversify your trades: Use a range of different currency pairs, and not just the most common pairs, like USD/JPY or USD/GBP. Including a mix of less volatile major pairs, while also trading more volatile minor and exotic pairs, will help you create a more even bet across your trades. So that any losses from more volatile minor pairs will be mitigated from less volatile major pairs. 

2. Calculate your risk/reward ratio: When making a trade, make sure that the money you could potentially make back from the trade justifies the amount you're paying for it. Working out the risk to reward ratio in forex will help not only keep you accountable but will help you when choosing which pairs to buy and sell.

3. Use stop loss orders: Designed to limit losses from a trade, a stop loss, also known as a 'stop order' or 'stop-market order' is an order type that will trigger a trade to be closed at a loss. A stop loss helps minimise loss and risk, but you must calculate at which point you want to employ this tactic.

4. Choose the right trading strategy: The strategy you use in your trading can determine the amount of risk involved. When choosing the right trading strategy, you should consider the market itself. Given the current volatility of all the exchange markets, it's prudent to choose a strategy that provides the least amount of risk based on your current knowledge level. As you become more experienced, you can change strategies that are more high risk but offer higher rewards.