Profit from Forex Trading Using Different Trading Styles
When compared with other financial markets, foreign exchange is the biggest and most liquid market in the world. Over five trillion dollars are being traded on a daily basis and this tells much about the daily liquidity in stake. Not all currency pairs are being traded on a constant basis as trading volume differs depending on different currencies and different currency pairs and this is one thing that makes traders use different trading techniques. Of course, that liquidity is just one thing to consider and actually is not even that important. The most important is the time horizon a trader has in mind for the open trades or for the profit to be reached. Based on this time horizon, there are different trading styles to be used, all of them with advantages and disadvantages, but suitable to each and every trader’s personality.
Three Major Trading Styles
For the first time a trader gets in contact with the Forex market, he/she tends to build different expectations based on the personality traits each person poses. Some dream of getting rich fast, others are dreaming of being able to trade successfully in order to drop their jobs and be their own boss, while others are simply having too much money and are looking to diversify their investments into a new market. No matter the motivation, we can talk about the following three trading styles people use when selling or buying on the foreign exchange market.
Scalping is a term that describes a short-term strategy for executing a trade. These traders are not looking for big returns number of pips, but merely for small moves market makes. In doing that, the trading setups are being taken from the lower time frames, like the five minutes and even the one-minute chart and constant attention and focus is needed for perfect execution. Because this is a time-consuming process and requires a lot of attention, in order for this trading style to make sense, trading volume is bigger than normal. After all, as we discussed here on Forex Trading Academy, the value of a pip is strongly correlated with the volume of the transaction that is opened. The bigger the volume, the more valuable a pip is.
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Therefore, if some trades are looking for a one hundred pips profit trading one lot, the same amount of money can be made by trading ten lots and holding the position for only ten pips. Scalpers, as these traders are being called, are looking for brokers that offer the fastest possible execution, little or no slippage, and, if possible, spreads closed to zero. They do not care if the account is a swap-free account or not, as they are not going to keep positions open overnight. While rewarding, it is a risky strategy as Forex markets tend to move quite fast at certain times and one cannot exit a trade exactly at the desired level. Under this strategies, even one pip can make the difference between a ten percent increase or decline in profitability. To avoid this risk, traders are not opening trades when important economic news are released and tend to trade in slow moving sessions, like the Asian session most of the times is.
Traders in this category are looking to hold positions until a take profit or a stop loss level is being reached or until a setup is being invalidated. This can take from a few hours to one day or even weeks and it means analysis and expectations are not being built from lower time frames. These traders are applying a top/down analysis to a currency pair and their setups are on the four hours and daily charts, looking to fade specific fundamental news and sometimes even trying to pick a top or a bottom. This is not an easy task and patience is key here. The main advantage of this trading style is that traders are not glued to the screens in order to execute a trade. They are well aware of the levels the market is at and the news that is about to be released and trade mostly using pending orders and are very active when volatile events like central banks interest rate decisions are being announced.
For these traders the type of a trading account doesn’t really matter in the sense that spreads can widen a bit, can be bigger than normal, and even swaps don’t really matter. What matters the most is execution and funds safety, so these traders will not trade if the broker is not regulated and if the funds are not segregated to a custodial bank.
The last trading style appeals to traders that do participate in the foreign exchange market out of a passion for trading. These people are passionate about trading but they do have other activities/jobs/hobbies in their life that they don’t want to give up. For these traders, investing is the right approach. What these guys are doing is they are looking on the bigger time frames only, starting from daily and ending with monthly charts, and trade accordingly. Over the weekend they look at the weekly closing, always consider the monthly closing as well and have bigger time horizons for a trade to reach take profit. These traders couldn’t care less about the news in front of them (second tier data of course not a central bank moving on rates as this matters for all traders). What they do care is to adjust the value of the pips to the necessary stop loss and that would be it. Swap-free Forex accounts are the ideal ones for the traders in this category as over the long run this strategy can be costly. To sum up, no matter the trading style and market expectations, trading should be made with a concrete plan in mind and all these trading styles imply a plan is already in place. The next thing to do is to successfully execute it.
Other educational materials
- What is Forex Trading?
- What is a Currency Pair?
- Majors and Crosses – How to Trade Them?
- How to Set Up an Expert Advisor
- HFT (High-Frequency Trading) in Forex Markets
- Trading Sessions and Their Importance
Recommended further readings
- An integrated eigenvector–DEA–TOPSIS methodology for portfolio risk evaluation in the FOREX spot market. Expert Systems with Applications Amiri, M., Zandieh, M., Vahdani, B., Soltani, R., & Roshanaei, V. (2010)., 37(1), 509-516.
- “Forex trading using geometry sensitive neural networks.” Sher, Gene I. In Proceedings of the 14th annual conference companion on Genetic and evolutionary computation, pp. 1533-1534. ACM, 2012.