You can invest your capital in the world’s currencies on the foreign exchange (forex) market. This is one of the most popular financial markets, as its volatile nature can present traders with many profitable opportunities.
You can speculate on the value of some of the world’s most popular and widely traded currency pairs on an online trading platform or broker, including:
- The euro against the US dollar — EUR/USD
- The US dollar against the Japanese yen — USD/JPY
- The pound sterling against the US dollar — GBP/USD
- The Australian dollar against the US dollar — AUD/USD
The volatile nature of the market means that prices are often subject to dramatic short-term changes, influenced by external factors, like current news and public releases of economic data. Because of this, you might want to consider employing a forex trading strategy, to help you to effectively manage your position and keep your trading journey on track.
This article will take a look at some of the most popular trading strategies, to help you to decide which is best suited to your trading style.
Read on to find out more.
Day trading is fairly self-explanatory, since it’s the process of conducting all of your trades within one day. This means that by the end of a trading day, all of your positions will be closed.
Day traders are highly active throughout the day, monitoring charts and assessing their position to maximise the returns that can be made within this timeframe. In order to minimise the risk of incurring losses, day traders will tend to set a daily risk limit of around 3%, meaning their losses will be automatically capped at this level.
In addition to this risk management tool, one of the most beneficial resources to use as a day trader is an economic calendar. This will inform you of the key economic events taking place throughout the year, which could affect the forex market. These could include:
- Releases of employment data
- Political elections
- Economic data releases, e.g., gross domestic product (GDP)
You might find that a medium-term trading strategy suits your trading style better. Rather than closing all trades at the end of the day, swing traders tend to hold a trade anywhere from two days to several weeks. This gives you greater flexibility, and your focus will be on longer-term price movements in the forex market, rather than short-term price fluctuations.
This trading strategy will require patience in order to maximise the profitability of your position. However, if you don’t have the time to dedicate checking the market throughout the day, this is a great option, since you’ll spend far less time than day-traders analysing data and identifying price changes.
If it’s a long-term position in the market that you’re looking for, then you’ll want to consider position trading. This is the process of maintaining a position in the market for months, or even years. Traders will typically use technical analysis to identify long-term trends and patterns, and act accordingly to maximise potential profits.
This strategy would suit the most patient and experienced of traders, so isn’t necessarily the best option for beginners. The forex market is inherently volatile and the longer you hold a position, the greater the risk of making losses.
The most important thing to remember when choosing a forex trading strategy, is that it’s completely tailored to you and therefore, should best suit your trading style and lifestyle. In addition to a well-conceived strategy, you could also implement an economic calendar to help you to plan ahead for future events that could affect the value of your investments.