Forex Trading Strategies
Tuesday, September 15th, 2009
There are many strategies for trading forex. Explanations for some can be found free online, while others form part of complex systems sold for substantial fees. Good currency trading strategies are certainly worth what they cost.
Currency trading is a business, and like any other business you need strategies for currency trading.
In any business, strategic planning involves answering questions about your current situation and where you want your business to go. It’s the same with setting strategies for your currency trading business. Consider these three questions and answer them fully and honestly.
which currency pairs will you trade?
This is a decision you make only after careful study of the various currencies traded. Some pairs are so volatile that their exchange rates vary many times in one day (called intra-day), while others remain fairly steady. As in any other type of market trading, volatility usually means more risk if you’re not on top of things, but it also can mean more profits if you are.
A term you need to understand in forex trading is “pip”, which stands for percentage in points. A pip is the smallest price increment in forex trading. In the forex market, you’ll see prices quoted to the fourth decimal point (except for the Japanese Yen, which is quoted to the second decimal point). As an example, Europs to U.S. Dollars (EUR/USD) could be bid at 1.1915 and offered at 1.1918. In such a case, the “spread” (or difference) is 3 pips (1.1918 less 1.1915).
Forex experts all have their own opinions about which currency pairs are most volatile. But here’s a guideline. Currency prices are often affected by economic indicators, both in their own and other countries, and any pair is affected 50% by each half of the pair. So in EUR/USD, for example, you’ll be affected 50% by the Euro and 50% by the U.S. Dollar. Since the Euro is affected by economic indicators in all the countries that use it as currency, it tends to move around a lot. For this reason, EUR/USD is often considered one of the most volatile pairs.
How long will you stay in a position?
This will depend in part on your answer to the first question, of course. In highly volatile pairs, you may want to be in and out of a trade in minutes! This type of trading pattern requires constant vigilance, of course. You can do this yourself, or employ a forex trading robot.
You’ll no doubt want to explore robot use at some time, but for now if you want to do the monitoring yourself, you should probably trade in less volatile currency pairs.
What is your exit strategy for the position?
Deciding on your exit strategy is an important part of your overall trading strategy. You can choose between a take-profit strategy (T/P) or a stop-loss strategy (S/L).
If you place a stop-loss order with your broker, you will set the prices at which you no longer wish to be in the trade because of the possibility of loss. Your position will automatically be converted to a market order to sell if the pair reaches that stop-loss point.
The opposite exit strategy is take-profit, in which case you place a limit order. The order to sell automatically kicks in when your stated profit point is reached with the pair. This ensures you can take a profit and get out of the trade before it begins to lose.
This is a basic overview of currency trading strategies.
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