8 min read
Forex, being one of the most popular trading instruments, has many approaches that traders utilize on a daily basis. Some traders use certain currency pairs that they know and prefer, researching for particular opportunities for the chosen assets. Others experiment with assets and timeframes. There is no right or wrong approach — no trading method will work for everyone, but there are some approaches that are more universally popular than others. The reason for this is the simplicity in understanding these techniques.
As an instrument that is available at certain hours five days a week, Forex has its limitations. It can’t be traded during the weekend and overnight fees are applied. Let’s look at the 3 common methods traders use on Forex.
1. Day trading
A method, designed for trading the market within the same trading day, implies that all of the deals are closed before the market closes. A trader opens a deal in order to follow a short-lived trend, then closes the deal and waits for the next short trend. Depending on the trader, they might make anywhere from 10 to 100 deals within one day, making sure to utilize risk management tools to manage losses.
This kind of approach means that traders will not be charged with overnight fees and will receive the result of their trading within several hours. The length of such deals may vary from several minutes to several hours, but all the positions are closed before the market closes.
Pros and cons
Day trading, as was mentioned above, means that you will not be charged with a swap fee and you will see your results within the same day. In addition to this, there might be several trading opportunities during the day which traders can focus on.
Among cons one may highlight the relatively lower potential returns — assets rarely make significant moves within the same day, so the returns will largely depend on the investment and the multiplier. Another con is the riskiness of short-term trading of such type: traders have to be cautious and control their emotions.
Day traders normally heavily rely on technical analysis. There is little that a day trader can do with economic news, since the impact of fundamental factors will be reflected on slightly longer timeframes. It is often that traders use all sorts of Moving Averages combinations in order to identify the trend and enter a deal.
2. Position trading
More patient, or, perhaps, more cautious traders prefer the position trading approach, which means that a trading position is held on a more long-term basis. Traders that favor this method normally aim to possibly take advantage of larger-scale market movements. Small price changes are irrelevant in this approach, since traders are focused on the bigger picture.
Pros and cons
An issue that traders may face with this method is the question of how long to hold the deal for. If day trading has the answer in its name, with position trading it may be a bit more complicated. A general approach is to focus on a certain benchmark of outcomes that traders may try to reach. Setting take profit and stop loss levels may help to know the limit of when it is better to exit the trade.
Since the strategy is oriented on bigger price swings, traders generally look for fundamental factors to base their forecast on. A good understanding of how economic factors affect markets is crucial for traders that wish to exercise this approach. Most traders combine fundamental and technical analysis for better results, and many traders look for candlestick patterns such as Head and Shoulders in order to attempt to predict the market movements.
3. Scalping strategy
While it might sound laborious to some, active traders that prefer the process of trading itself, often turn to scalping as their main approach. This strategy implies opening multiple short (30 sec – 1 min) trades within the day, striving for the minimal outcome.
Pros and cons
This strategy may sound illogical, since normally a good outcome is the main goal of a trader. However, traders that implement this approach consider small outcomes sufficient, taking the amount of deals in account.
Since the deals are so short, traders may use small investment amounts, but the flow of this approach is still risky, since deals can turn unprofitable and a trader can lose their whole balance in an attempt to recover.
When it comes to scalping, technical analysis may be useful as many indicators work well on short timeframes. The only important point to note is that past performance of an asset is not a correct indicator of the future price changes. Any indicator can make a mistake and show incorrect signals. When scalping, traders have to be extra conscious of that since catching false signals on such short timeframes may be challenging.
Regardless of the approach you choose, it is always better to test it out on the practice account first. Trying every strategy with practice money before utilizing your real funds is a good way to safely explore your trading preferences.