Forex trading is one of the most versatile types of investments. You can profit from price movement in either direction. You can magnify your returns to almost any degree through high amounts of leverage. You can profit in the long-term scale or profitably work with trades that last only a few minutes. You can even expand into currency futures and add options trading.
However, this also means that the forex market involves lots of different trading strategies. For the sake of simplicity, we can say that these range from the short-term to long term strategies.
At the smallest time durations, scalping takes advantage of the micro-volatility a currency pair might experience. Most scalpers open at least a hundred positions in a single day and the majority of those trades stay open for less than five minutes. The focus is rarely on trends or the fundamentals behind the currencies as much as the quick jumps that are always happening.
Swing traders are more concerned with trends. As the name suggests, they usually open a trade at the top or bottom of a price trend, just as it reaches support or resistance. If all goes as planned, the currency will turn and they can profit from the next trend—hopefully closing the trade just as the price reaches new support or resistance.
Carry trades are inherently longer term because they rely on the underlying interest rates between currencies. For instance, JPY (the Japanese Yen) maintained rock-bottom interest rates for many years. At the same time, interest rates were much higher elsewhere in the industrialized world. So if you used yen to buy dollars, for instance, and held them for a certain period of time, your profit would be the difference between the two interest rates. Magnify this with leverage, and it might be significant.
Of course, the most basic type of trading is a medium to long-term strategy based on the fundamentals. Here, you simply evaluate where you think a given currency is going and try to find a pair with one currency headed up and another headed down. If your guess is right, holding the pair for an appropriate length of time can yield good profits.
So what is the best strategy? Like most questions in investment, this has no simple answer. Each strategy has pros and cons. The cons for scalping are the constant focus it requires, the temptation to raise leverage inappropriately, and the challenge of forex brokers that allow it. Swing trading requires a good sense of timing and facility with several technical analysis tools. Carry trades are often simple to research, but it is increasingly hard to find good pairs to use since most of the industrialized nations now have extremely low interest rates.
In general, the most versatile strategy and the most useful for beginning traders is day trading based on the fundamentals. A medium range is also helpful because it requires low capital with minimal risk. This simple method is also a good starting point. As you gain more experience you can specialize into other trading strategies.
If you are an experienced trader, try learning strategies you have never used before. The ideal is to have facility in all of the methods and be able to switch between them. Certain opportunities are ideal for certain strategies but not others. If you know how to use all of the methods, you can adjust quickly and maximize your profits at any one time.
So what is the best strategy? Here’s a simple answer—probably a hybrid form of them all!
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