Currency Trading, also referred to as foreign exchange or forex, corresponds to the buying and selling of foreign currency on the foreign exchange market. The main purpose of this method is to generate wealth. It is sometimes referred to as ‘forex speculative trading.’
Liquidity is the key element that distinguishes currency trading from other types of trading.
While this market can deliver impressive returns, at the same time it carries a high degree of risk. Of the different threats, the biggest is the effect of news and events on the market. Due to this reason, the traders should have a solid trading strategy.
But, What is a Currency Trading Strategy? A currency trading strategy refers to a forex trader’s method to monitor when buying or selling a currency pair. There are a variety of currency trading techniques that traders can use, including technical analysis and fundamental analysis. A sound forex trading strategy enables traders to research the market and safely participate in trading with a broad variety of risk management techniques, such as risk analysis, entry points & exit points.
The fundamental analysis is focused on key factors such as real incidents affecting the economy and others. On the opposite end, the technical analysis includes the analysis of recent patterns in currency prices, and their pattern is studied to decide how to go forward.
Below are some of the most commonly chosen currency trading strategies:
Price Action Strategy: Price action trading is one of the simplest ways to learn, and one of the most efficient trading techniques. If you’ve just started trading, learning price action trading is a great starting point. This approach is based on price action and does not involve any metrics or techniques. The basis of this strategy is that currency trading is focused precisely on price action — bulls and bears. It includes the experience of managing current prices, bulls or bears, and the resulting action to be taken.
The most important feature of the price action strategy is that it works well in all sorts of market environments, from trending to volatile, ranging or less unpredictable. This is why it is considered fast, efficient and convenient, and helps to remove the clutter of extremely volatile price variations.
The price action trader remains under the assumption that only a real source of knowledge comes from the price. If the stock rises, it conveys to the price action trader that people are interested in buying. The trader then assesses, based on the ferociousness of buying, whether or not it will proceed. Price action traders typically don’t care about the logic behind anything going on.
Range Trading Strategy: This is another currency trading technique that is more popular today. Contrary to the subsequent trend, Range trading perceives forex traders going both long and short depending on the price position within that range. In general, trend-following traders will follow the trend’s normal course, buy stocks in an emerging trend, and sell stocks in a declining one.
The secret to effectiveness in the range trading strategy is to evaluate the attractive price levels, i.e. the price points at which sellers avoid selling and buyers are expected to buy. The predominant supply and demand of the currency, signified by resistance and support, is correlated with these price levels. With the assumption that the price will come down to a long-term average, the investor invests in the currency.
Position Trading Strategy: The overview of common currency trading strategies will be incomplete without including a position trading strategy. Position trading is a collective trading technique where a trader holds a stable position for a long period, usually for several months or years. Position traders transcend short-term market fluctuations in favor of indicative and benefit from longer-term trends. This form of trading most closely looks like investing, with the only difference being that buy-and-hold investors are limited to a wide variety of transactions.
Position trading has the longest time frame of all currency trading strategies. There is therefore a higher potential for benefit — as well as an increased characteristic risk.
Carry Trade Strategy: A carry trade in currency trading refers to a situation in which the trader seeks to gain income from the adjustment in interest rates — called the interest rate differential — between the two forex currencies. There are two main approaches to currency trading: positive and negative.
Currency carry trades work by enabling market participants to benefit from differences in interest rates between different currencies. As forex is typically exchanged in pairs, traders sell one currency at the same time as purchasing another. It is this level of uncertainty in forex trading that makes currency carry trades plausible.
Disclaimer: There are potential risks relating to trading and investing and you should not trade with money that you cannot afford to lose however, for those that educate themselves and adopt appropriate risk management strategies, the potential update can be significant. Please note that all opinions, research, analysis, and other information are provided as general market commentary and not as specific investment advice.
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