Foreign currency trading strategies vary depending on the style of the trader and investment capital available. If you're wanting to begin trading, it's important to understand the different general strategies you can use to plan your own specific strategy suitable to your style and financial position. Here we'll look at Short-Term, also called “scalping” or “day trading”, Medium-Term and Long-Term trading.
Forex scalping strategies involve getting in and out of the market several times a day, executing multiple trades to make smaller, quick profits off of what long-term traders would see as fluctuations. It's those fluctuations in currency prices that the day trader relies on. It generally relates to entering and exiting trades with all positions being closed off at the end of the day.
Day trading is a popular and profitable form of trading used by many professional investors for a number of reasons. It is lower risk in comparison to the very high returns if executed properly in a highly leveraged account. Besides the “instant gratification” that is appealing, exposure to risks is lessened due to the ability to quickly get out of bad trades and realize small profits in good trades. Small pips in a large number of trades can accumulate to substantial profits by the end of the day.
The disadvantage of scalping in the foreign currency market is that it can only be used with high leverage to see any significant profits. While the speed of trading currency fluctuations can result in quick gains, they can also result in great losses. The key is managing your money effectively; much more difficult when operating in shorter time frames. The trader must be mentally and physically quick to be able to manage the seconds-long trades. Utilizing a reliable automated scalping system, with the forex trading robot automatically executing trades, is particularly valuable in day trading.
The Medium-Term forex trader is typically looking to hold positions for a day or more, often taking advantage of technical indicators pointing to profitable trades and trading with the odds. The advantage of Medium-Term trading for retail traders is that it requires the lowest capital of all three types of trading because leverage is only needed to boost profits.
Medium-Term trading usually depends on technical analysis, charts and indicators, to determine the likely direction of currency prices. Using candlestick charts to examine such indicators as moving averages, relative strength index, stochastics, and moving average convergence divergence looking for trends, the trader can analyze market momentum and strength.
A degree in economics is not required to make sense of these indicators, rather just a working knowledge of a handful of them and an understanding of how to trade on them. Your well-defined trading system will incorporate the combination of indicators to signal specific entry and exit points.
Long-Term traders hold positions for months or years, looking more at long-term fundamental factors. To cover volatile movements, large capital investment is required against open positions. It can result in more long-term profits because it depends on reliable fundamental factors.
Long-Term fundamental traders focus on economic reports and news releases, including politics and social changes, affecting the value of a currency to determine market movement over a more extending time period. Fundamental traders rely less on charts and indicators that reflect what the market has done, rather than what it will do further into the future. For this type of trading, the future direction of the market hinges on the news and economic reports being released today.
Now that you have this overview of the different types of trading, you should be better able to determine which is the best fit for you to develop your reliable own trading system.
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