One of the largest markets in the world is the Foreign Currency Exchange Market or the Forex market. This decentralized market for financial exchange is deregulated and distributed all over the world for trading spot currencies. The trading that takes place in the forex market determines the price of everything we consume in our daily lives. Before discussing the trading strategies, it is important to understand what is meant by the term Forex Trading.
What is Forex Trading?
To explain it in simple terms, forex trading is quite similar to the currencies we exchange while traveling to a different country. In a similar way, a trader in the forex market buys and sells a quantity of currency against another. Based on the demand and supply, the exchange rate of the currencies fluctuates. Like in the stock market, there is no physical exchange of currencies, and all the forex trading is conducted over the counter (OTC). Instead of a central exchange like the NYSE, there is a global network of financial institutions and banks that oversee the forex market.
Most of the forex trading activity occurs between institutional traders, which comprise fund managers, multinational corporations, and banks. The table for the exchange rate of currencies is updated every second. The currencies in this table are assigned a three-letter code. Although there are more than 170 currencies all over the world, the majority of forex trading is done in U.S. dollars (USD). Other major currencies are the British Pound (GBP), Euro (EUR), Swiss Franc (CHF), Japanese Yen (YEN), New Zealand Dollar (NZD), Australian Dollar (AUS), and Canadian Dollar (CAD). Following is a list of 7 currency pairs that account for more than 75% of forex trading.
Forex Trading Strategies
There are certain trading strategies that can provide some form of structure to your trading efforts in the forex market. You can choose to apply a single trading strategy or combine several of them in forex trading.
1. Forex Day Trading
The process of trading currencies in one trading day is known as Day Trading. Although the Day Trading strategy is applicable to all markets, it is mostly used in Forex. It can be useful for people who want to trade for short periods as it allows you to open and close trades in a single day. The trade is not carried overnight, and the intraday price changes for a currency pair result in profit and losses. In this trading strategy, you would need to have a thorough understanding of the ways in which the economy could affect your currency pair. This can be done by following the news for scheduled events like interest rates, economic statistics, elections, GDP, and others.
2. Forex Swing Trading
The strategy of Swing Trading is more appropriate for those who prefer a mid-term style, where the trading positions are held for several days. This strategy takes advantage of the surges in the price momentum that takes place in the short term. These surges are identified as ‘swing lows’ and ‘swing highs.’ In this forex trading strategy, you do not have to analyze the overall market trends, and you spend less time fixating on the market. However, the downside to this is that it often involves the risk of gapping or overnight disruption.
3. Forex Trend Trading
The Trend Trading Strategy in Forex is the simplest one out of all the strategies. In this, you can trade in the direction of the price trend that is prevailing. Employing this strategy requires the identification of the overarching strength, duration, and direction of the price trends. By observing these factors, you can get a better idea of the best time to exit the current position so as to limit the losses and lock in profits.
4. Forex Position Trading
For people who prefer to concentrate on long-term trading, the Position Trading strategy is the best option. This is suitable for the patient traders who are not concerned with market fluctuations in the short term. The position in this forex trading strategy is held for a lengthy period of time, sometimes for weeks, months, and even for several years. The traders in this strategy aim that the value of the currency pair could increase over a long period of time. This trading strategy is better suited for those people who have a deep understanding of the fundamentals of the market.
5. Forex Carry Trading
In the Carry Trade strategy, you can borrow from a currency pair with a low interest rate to fund another currency pair with a higher interest rate. The ultimate aim of this strategy is to generate profit from the difference in the interest rates of the two currencies.
There are many other advanced trading strategies that have been specifically designed for the Forex market. These consist of the Running out of steam strategy, Breakout strategy, Breakdown strategy, and Overbought and Oversold strategies.