Foreign exchange currency trading is made possible by the constantly fluctuating values of currencies in the forex markets. Traders buy currencies with the hope that their prices will go up in the near future, and sell them when they feel that they prices will soon drop. It sounds simple but there are a lot of factors that influence the fluctuations of currencies and how the markets will behave. Since the conditions of the markets change on a constant basis, traders need to apply various forex strategies to ensure that they maximize on their gains.
Day trading forex strategies
The various forex strategies used are based on the degree of risk that investors are willing to accept, the expected returns and the funds that are withheld. Many traders are known to engage in day trading, which involves buying currencies and selling them on the same day. This strategy enables them to open and close multiple positions, which can be as many as several hundred times on the same currency pair. The profits from a single transaction may not seem so big, but after adding the profits from all the multiple positions, the returns are just as good as those earned with long-term strategies.
The big advantage of day trading is that traders do not have to hold positions overnight so they can sleep without any worries. Anything can happen overnight to completely change the direction of the markets, causing those who are holding positions to suffer sudden unexpected losses. Keeping an eye on the markets throughout 24 hours of trading is not easy so many traders opt for the safety of day trading. However, day trading also has the disadvantage of traps that traders can fall into, especially new traders with little experience in the markets. New traders are known to invest large amounts in many new open positions. With poor money management skills, they end up with huge losses when trades do not go their way. New traders are also known to get too emotional, whether they are winning or losing, and this clouds their judgment when they are making trading decisions.
Scalping is one of the most popular forex strategies used in day trading. This strategy involves opening and closing positions rapidly at a profit. The positions held when scalping usually last only a few seconds or minutes. Unlike long-term strategies, scalping does not seek large profits from each transaction. The aim of the scalping strategy is to achieve small gains in multiple profitable trades. The magnitude of profits and losses are roughly equal for each transaction. This is in contrast to long-term strategies that benefit mostly from higher profits arising from winning trades rather than losses. In order to earn the same amounts as long-term traders, scalpers have to get more winning trades than losses.
There are several advantages associated with scalping as a forex trading strategy. First, there is reduced exposure to risk. Scalpers make use of small price movements happening within a short time, so their positions are not exposed to large fluctuations. It is also possible to use a stop loss to prevent large losses from a single transaction. Secondly, scalpers are able to make gains in a quiet market. Wins are possible even when the odds are against them. Since they use mostly bigger positions and smaller price changes, scalpers can jump ahead a few pips.
There are also forex strategies that revolve around economic and political news. This strategy is simple since any forex news will change the currency value positively or negatively. Before such news is released, there will be many experts commenting on the possible changes expected in the markets. This has the effect of driving investors to trade in a certain way.