Currency Trading Strategies
Currency trading strategies are numerous. 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.
Currency trading is a business, and like any other business you need strategies for currency trading.
In any business, strategic planning involves answering questions about your current situation and where you want your business to go. The same steps apply to setting strategy for your forex trading business — here are three questions to answer as you begin to set your currency trading strategies.
which currency pairs will you trade?
Think carefully and study the currencies before making this decision. Volatility levels are high in some pairs and lower in others. As in any investment, volatile markets are risky, but their returns can be very high.
A term you need to understand 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. Economic indicators in their own and other countries often affect currency prices. Any pair of currencies 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. EUR/USD is often considered one of the most volatile pairs, largely because the Euro is influenced by the economies of all European Union countries.
How long will you stay in a position?
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. Of course, to do that you’ll need to be on top of things all the time. 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.
You’ll no doubt want to explore robot use at some time, but for now if you want to do the monitoring yourself, you should probably trade in less volatile currency pairs.
What is your exit strategy for the position?
Deciding on your exit strategy is an important part of your overall trading strategy. 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 take-profit strategy depends on what is called a limit order, or simply limit. When your designated profit point has been reached, you are automatically switched to a market order to sell. You would do this to ensure that you take a profit on a position in case it suddenly reverses itself and starts to be a loser.
This is a basic overview of currency trading strategies.
