Strategies for Trading Forex
There are many strategies for trading forex. You can find lots of free explanations online, and you can also pay substantial sums of money to learn these strategies. Good currency trading strategies are definitely a good investment.
But in one way, currency trading strategies are like any other business strategies.
In any business, strategic planning involves answering questions about your current situation and where you want your business to go. The same steps apply to setting strategy for your forex trading business — here are three questions to answer as you begin to set your currency trading strategies.
What currency pairs will you trade?
Think carefully and study the currencies before making this decision. 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).
If you ask experts which pairs are most volatile, you’ll get many different opinions. But here’s a guideline. Economic indicators in their own and other countries often affect currency prices. Any pair of currencies 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?
Of course this will partly depend on your choice of currency pairs to trade. In highly volatile pairs, you may want to be in and out of a trade in minutes! Of course, to do that you’ll need to be on top of things all the time. You can do this by being in front of your computer full-time and watching the market yourself, or you can make use of forex robot trading.
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?
An important part of currency trading strategies is deciding under what circumstances you will exit a trade. 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 take-profit strategy depends on what is called a limit order, or simply limit. When your designated profit point has been reached, you are automatically switched to a market order to sell. You would do this to ensure that you take a profit on a position in case it suddenly reverses itself and starts to be a loser.
This is a basic overview of currency trading strategies.