Techniques for Trading Forex

When it comes to the different techniques of trading forex, you can generally break it down into two different categories: long term trading and short term trading. Both of these trading techniques have advantages and disadvantages, so figuring out what kind of trader you want to be depends on what is most important to you.

With long term forex trading, traders base their analysis on the day’s end data and look to hold trades for long periods of time ranging from weeks up to many months. Following the trend, long term trading requires no need to watch the markets intraday and allows traders to perform fewer transactions which lowers commission costs.

However, some of the disadvantages to long term trading are the fact that you will need to set up much larger stops and will more than likely experience bigger equity swings. Because of this, long term forex traders need to be well financed and prepared for these types of events. Since trades are very few, patience is something that is needed in order to be a good long term trader.

In short term forex trading, traders will need to depend on intraday analysis and look to hold positions for a few days and at most up to a week or two. If you are going to trade forex in this way you will usually be performing swing trading. Not only that, but day trading becomes a big part of it, where a trader tries to take small profits from intraday swings, making sure they are out of all positions by the end of the market day.

As with any type of forex trading, there are always negative aspects that can occur. With short term trading, the cost of transactions will be much higher. Traders also may bring upon themselves overnight risk. Day traders deal with psychological issues due to the frequency of trading and the need to monitor the market at all times. This technique of forex trading can be very stressful.

Scalping

The point of this strategy is to use very small profits very quickly from small movements of price. These trades are usually entered and exited within moments. The reason this strategy works is because of all the small profits eventually adding up. When the quantity of daily trades are extremely high, the profits from scalping can really add up for these traders.

Intraday Trading

Intraday trading is also known to many as day trading. This forex trading fundamental requires all positions to be closed at the end of each trading day. In this strategy, the number of trades per day is much lower than in scalping, and even though some of the time frames may be very short, most trades are usually looked at closely and performed over time frames such as 1-hour charts and 15 minute entries. This is a day to day trading technique and may not be used every day, depending on the opportunities that day.

Position Trading

The position trading strategy is where you increase your position size incrementally as the trade evolves, keeping the same initial level of risk. This technique is also referred to as averaging into a position; this is when a trader adds a new position of the same size and same direction every time the risk of the previous trade can be covered. One advantage of this type of forex trading is that you don’t need to continually monitor the market throughout the day, only from time to time.

Swing Trading

The technique swing trading comes from price fluctuations in large moves being referred to as swings. This is where the price goes up for a while, and then goes all the way back down. The strategy is used by traders who go with those swings and obtain profits from them. Once the trader feels like the price is reaching a top or bottom, they will enter a short or long market, depending on the situation, in order to profit from the expected move.

Straddle Trading

A straddle is the action of placing both a buy and a sell pending stop order above and below the current price. This is where no direction is expected, and the trader prepares for a move either way. These straddles are often used in news trading and are put in before the outcome of a news release. Straddle trading is very helpful during unpredictable market conditions and is usually very appealing to traders who don’t have the luxury of spending a lot of time at the computer.