Currency Trading Strategies
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.
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. 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?
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 investment, volatile markets are risky, but their returns can be very high.
A common term 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. 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.
Do you plan a long stay in this position, or will it be a quick in-and-out?
This will depend in part on your answer to the first question, of course. Traders who like to trade in highly volatile pairs can be in and out of trades in minutes. This type of trading pattern requires constant vigilance, of course. 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.
If you don’t want to use robots yet (but you should at some point) and you can’t devote yourself full time to forex trading, you might want to look for less volatile pairs to trade for now.
Under what conditions will you exit the position?
An important part of currency trading strategies is deciding under what circumstances you will exit a trade. There are two kinds of exit strategy: take-profit and stop-loss, sometimes known as T/P and S/L.
A stop-loss order placed with your broker will set the price at which you will exit the trade to avoid possible 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 simplified summary of currency trading strategies.
