Currency trading (Forex trading) is the world’s most actively traded market with volumes in the region of $5 trillion per day. This dwarfs the total value of trading on stock exchanges by a long margin, since Forex greases the wheels of the world’s economy. Forex trading is driven by speculative activity – institutional investors, brokerages, hedge funds, and major market players who project forex values.
The art of buying and selling forex may appear easy, but it requires substantial trading expertise to master.
On a rudimentary level, you learn how to trade forex by simply picking the direction a major, minor, or exotic currency pair is going to move. Is it going to appreciate or depreciate? A better understanding of the Forex market is possible by evaluating the technical and fundamental factors of the currency market. We will explore several Forex trading techniques to guide you to success.
Forex Options Trading
FX options are contracts whereby a trader agrees to buy a currency pair at a set price in the future. Take an example as a case in point; perhaps you are interested in the USD/ZAR currency pair, with a spot price of 15:1. It is possible to use FX options as hedges of spot forex positions. If you’re buying the USD/ZAR pair, but you feel that there may be a decline in the price, you can also purchase a USD forward option to generate profit from the falling price, while holding onto your buy.
It’s possible to sell the USD/ZAR short while simultaneously buying the option. Naturally, there are many neutral, bullish, or bearish strategies that you can employ with FX options contracts. These include, but are not limited to condors, butterflies, straddles, and vertical spreads. In all cases, the forex option is based on the base currency, in this case the USD. If you are bearish on the USD then you should buy puts and sell calls. If you are bullish on the USD, you should sell puts and buy calls.
Position Trading on Forex
‘Buy and Hold’ forex traders typically adopt a long-term approach, using a combination of macroeconomic variables and long-term charting and analysis. With position trading, a forex trader takes a position on an asset, anticipating major trends. Small price movements are irrelevant to position traders. For them, the focus is capturing the overall trend. Not much time is needed to position trade with Forex, and following initial research, position traders can determine how they wish to trade the asset.
Occasional monitoring of the asset’s price is done, but since minor price movements are ignored, only the overall trend matters. Position traders pick a limited selection of assets to trade, and make up to 3 trades each year. By contrast, swing traders make at least 25 – several hundred trades every year, while day traders are working the market big league with thousands of trades. With position trading, forex traders must beware. If you ignore minor price fluctuations, they can snowball into a trend. This downtrend or uptrend could impact your profitability. Safeguards are necessary to protect the asset holding with position trading.
Scalping in Forex
Scalping systems are designed to generate profits by buying/selling currency pairs. The forex trader holds the position for a limited time, and closes for small profits. With scalping strategies, the objective is to make multiple trades, each with small profits during a regular trading day. Forex traders use technical analysis (charts, graphs, patterns) to determine the signals for scalping strategies.
Given that such small profits are generated on these trades, forex scalpers typically have large budgets which are then leveraged in the market for access to bigger profits. Among the many pros of forex scalping is the ability to generate large profits in quick time. You don’t need a whole lot of experience to dabble in Forex scalping, but there is a huge degree of risk to the downside if markets turn against you. With small yields in the region of 1-10 pips, massive volumes are needed to generate any return with scalping activity.