What are the different strategies when trading forex?
Trading forex and international currencies can be deceptively challenging, thanks largely to the market’s innate volatility and inflated leverage.
This is borne out by the various trading strategies available to investors, which are designed to suit different risk profiles and the precise ways in which individuals look to profit from price movements.
In this post, we’ll address four of the most widely used trading strategies, while considering their pros and cons from an investor perspective.
Scalping is an inherently short-term method of trading, and one that requires investors to hold open positions for seconds or minutes at the most.
Typically, scalps will look to derive profit from a huge volume of orders each day, with a view to earning incremental returns from every single one. In fact, scalping is often used as a viable futures trading strategy, and one that can help you to capitalise on volatility in the marketplace.
This strategy demands tight spread and liquid markets, so scalpers typically focus on major currency pairs (such as EUR/USD and USD/JPY) which are easier to buy and sell in real-time.
- Day Trading
Scalping is a little intense and high-risk for many, but you still may want to leverage the forex market’s volatility to your advantage.
In this case, you may want to consider day trading, which requires you to open a considerably smaller number of positions while ensuring that none of these are maintained overnight.
This negates the risk of any large overnight price moves, while individual positions usually remain open for a period of minutes or hours. You’ll have more time to analyse the markets with this strategy, although it remains a relatively risky and fast-paced strategy.
- Swing Trading
Next up is swing trading, which is slightly different in that it encourages investors to hold open positions for several days at a time.
In fact, swing trading enables you to potentially hold positions for a few weeks, enabling you to capture short and medium-term market movements without constantly having to monitor charts and analytical tools.
As a result, it’s definitely the ideal choice for part-time investors, especially those that want to combine trading with a full-time job.
- Position Trading
Position trading is a long-term investment vehicle, and one that’s focused on profiting from major and sustainable shifts in market price points.
Because of this, positions can span a period of weeks, months and even years in some instances, with weekly or monthly price charts utilised to evaluate market movements.
A combination of fundamental analysis and technical indicators is also used to identify potential entry and exit points when trading, while this strategy offers the advantage (at least from a risk-averse investor’s perspective) of not being undermined by minor or short-term price shifts.