Forex Trading Strategies 101


One of the largest financial markets in the world is the decentralized foreign exchange market where currency traders from around the globe trade $3.98 trillion in foreign currency each day, while using a variety of forex trading strategies. Operating five days a week, 24-hours-a-day, currency traders in New York, London, Tokyo, Hong Kong and other Asian and European cities set the values of the world’s money, country by country, through their daily trading.

In this huge foreign currency market, linked by computerized trading platforms deep in the offices of large global banks, brokerage houses, central banks, hedge funds, investment houses, retail traders and speculators, the primary purpose of the foreign exchange market is to aid international trade and investment by allowing businesses to convert one currency into another currency.
Although there is no centralized market, the United Kingdom, primarily London, is responsible for 36.7 percent of the $3.98 trillion traded daily, while traders in the United States account for 17.6 percent of the average daily total and Japanese traders account for 6.2 percent of the daily volume.

In this global foreign exchange market, the major currencies are traded in pairs: for example, Euro/USD, JPY/USD, Great Britain Pound, GBP/ USD. When a trader, using forex trading strategies, buys the Euro, the trader is simultaneously selling the United States dollar and when the trader buys the United States dollar, the trader is selling the Japanese Yen. And, on each trade, there is a transaction price, pips price, the difference between the spread on the bid and ask prices that the trader pays as part of the cost of making the trade.

In addition to trading currencies in the global foreign exchange markets, large commercial banks, governments, corporations, broker/dealers, speculators and retail traders use forex trading strategies for currency futures, currency spot prices, currency options and other currency derivatives. Of the $3.98 trillion daily trading volume, $1.45 trillion is in spot currency transactions, $1.765 trillion is in foreign exchange transactions, $475 billion is outright currency fund transactions, $43 billion in currency swap transactions and $207 billion in currency option transactions.
By using forex trading strategies, many traders become aware when currency fluctuations are triggered by economic and political developments, or changes in market psychology. Economic news, for individual countries, determines the day-to-day price fluctuations of a country’s currency. Inflation, growth in gross domestic product, trade balances and trade imbalances, interest rate hikes and rate cuts, indicators of a country’s economic health, lead to both short-term and long-term fluctuations in currency prices.

As part of their forex trading strategies, many short-term traders, using software and technical analysis, pick out short term price tops and price bottoms, along with pivot points, and do short-term trades, by setting sell price targets and stops, only a few a pips above a recent high.
Other traders, using forex trading strategies, try to capture a swing trade, marked by a change in the price trend of the currency and triggered by an economic or a political turnaround in a particular currency. If a country’s gross domestic growth projections are beginning to improve, this may mark the beginning of an uptrend in the country’s currency.

There are various forex trading strategies you can learn, so first you have to decide which kind of trader you are: day trader, swing trader, short term trader, long term trader and only then build your strategy and bankroll slow and steady. This way with time, experience, trial and error you will become an expert trader and eventually make good money from trading.

Here are some strategies to consider while trading:

Entering a position

Entering a position is the easy step in trading, you always buy a stock or a currency once it breaks its high or resistance, or after it performed a fix, but do you know when to sell it? How much to sell?

When to sell and how much

Here you have several options to manage your trade:

1. Usually a stock goes up or down 3% before it stops and takes the other way around, that is why one option you have is to sell 75% of your position once you’ve made 3% profit and set your stop lose to the rest of the 25% to the price you initially bought the stock or currency and entered the position. This way you gain profit from your 75% of the position and if the stock goes up you have 25% still in play to earn from, but if it happens to go down you won’t lose it since you’ll exit the position at the price you initially entered so in any case you’ve made 75% profit of your position and earned almost the entire 3% rise.

2. Same as before, only this time you can sell only 50% of your position if you’re sure the stock or currency will keep giving you profit. The remaining 50% you set for a stop lose of the initial price you’ve entered the position because the golden rule in trading is – you never return money back to the market.

3. When should you sell exactly? Once a position reached its price to sell, do you sell it immediately or at the end of the trading day? Here you have two options and again there is no right or wrong only what suits you as a trader, this is why there are many strategies. You can sell the stock or currency once it reaches the specific price no matter at what stage of the trading you are, or you can sell it only if it’s at that specific price (or near it) just before trading day ends to confirm that this is the price of the stock. Some traders sell immediately and don’t risk their bankroll, some prefer to verify that this is the price of the stock at the end of the trading day before selling it.

These are only a few strategies that will help you trade better and know when to exit a position as it is as important just as to know when to enter a position but stay tuned as there will be more strategies to learn soon…