There are three main types of FX trading: speculation, investing and hedging. Speculative forex trading involves short-term positions, while investors in the FX market tend to keep their positions open for a longer period. Of course, there is no strict cut-off time for when a position is considered an investment rather than speculation. It’s more of a sliding scale.
Hedging is about managing risk. A person or a legal entity can purchase currency or FX derivates to mitigate other risks. A company that receives most of its earnings in one currency but have expenses in another can, for instance, use FX hedging to manage the currency risk. They want to protect themselves from the risk of losing a lot of money if the first currency drops sharply in value in relation to the other currency.
Another alternative if you want to make money on the FX market is trading CFDs or currency-backed binary options. Binary options allow you to make larger profits with a limited downside. You never risk losing more money than you have lost. You can learn more about Binary Options by visiting binaryoptions.net.
Basics of Retail Forex Trading
Currency Pairs
Forex trading revolves around currency pairs, where one currency is exchanged for another. Each pair consists of a base currency and a quote currency. For example, in the EUR/USD pair, EUR is the base currency, and USD is the quote currency. The price of the pair indicates how much of the quoted currency is needed to purchase one unit of the base currency.
Leverage
A hallmark of forex trading is the use of leverage, which allows traders to control a large position with a relatively small amount of capital. While leverage can amplify profits, it also increases potential losses, making it crucial for retail traders to understand and manage the associated risks.
The Mechanics of Retail Forex Trading
Forex Brokers
Retail traders typically access the forex market through brokers. These brokers offer online trading platforms, like MetaTrader 4 or 5, where traders can execute trades, analyze charts, and apply technical indicators. Choosing a reputable broker is essential, considering factors like regulation, trading fees, and available tools.
Order Types
Traders can use various order types, including:
- Market Orders: Execute a trade immediately at the current market price.
- Limit Orders: Set a specific price at which to buy or sell.
- Stop Orders: Trigger a market order once a certain price level is reached.
- Take Profit and Stop Loss: Close a position automatically at a predefined profit level or loss limit.
Examples of Forex trading strategies
Bladerunner
This strategy is a price action strategy utilized for all currency pairs. It can be used for short-term, medium-term and long-term positions.
Bollinger Band Bounce
This strategy was developed for raging markets. Using it together with confirming signals rather than alone is advisable.
Daily Fibonacci Pivot
This strategy is based on the Fibonacci sequence and is normally used for daily pivots only (any number of pivots). Fibonacci retracements and extensions are combined.
Overlapping Fibonacci
This is another FX strategy based on the famous Fibonacci sequence. Using it together with confirming signals rather than alone is advisable.
Pop ‘n’ Stop
A method for increasing your ability to correctly predict if the price will continue to rise when you have spotted an upward trend.
FX scalping
FX scalping is a method of arbitrage. The successful FX scalper makes a profit by exploiting small price gaps created by the bid-ask spread. FX scalping is popular among FX day traders. One advantage of this method is that you can make money even when the bid price and ask price aren’t moving. Scalpers love stable markets.
Traders involved in FX scalping will simply buy at the bid price sell at the ask price, and pocket the difference. Typically, the time between buying and selling will be very short – sometimes considerably less than one minute. It is, therefore, important to use an FX site where super-fast transactions are possible. Also, you need a reasonably fast computer and a reliable and fast internet connection.
You will need to use a forex broker with a small spread to make money scalping forex.
Long-term investments (positional trading)
If you aren’t willing and able to spend a lot of time on FX trading, long-term investments in currency are usually a better choice than day trading and other types of short-term speculation. You keep a position open for a long time, e.g. several weeks, and don’t fret too much about small swings up and down. What you are interested in is where the price is going in the long term.
Generally speaking, it is best to avoid leverage or, at the very least, refrain from making highly leveraged trades. You are exposing yourself to long-term risks.