This article looks at forex trading strategies and how it is used.
If you are a beginner in the market, you have a choice of several forex trading strategies. However, most trading strategies fall into two wide categories of speculating and hedging.
Most investors fall into this category as their activities involve the purchase and sale of a financial asset. Forex traders remain hopeful that the value of one currency will rise compared to the value of another currency. Most currency trading is done with a handful of extremely active and liquid currency pairs. If you are interested in trading these popular pairs, you should understand the reasons for the movements in the value of the pair. You need to undertake effective analysis and draft graphs to aid you in your trading. It is important for you to understand the effect of other economic factors on your currency pair’s price movement. You should bear in mind that it is not only economic movements that could cause a movement in currency price. Factors such political stability play an extremely important role in the valuation of a country’s currency.
Companies who sell their services or goods in foreign countries are normally paid in the domestic currency of the other country. Currencies are constantly fluctuating and this can cause the value of that sale to become less than the company was hoping to receive. To try and avoid this type of loss, companies have the option to protect themselves against this fluctuation by trading the currency pairs required.
Traders who operate in the international financial market often make use of hedging strategies to try and increase the gains on their investments. For example, a mutual fund manager who intends holding Singapore stocks may not want to take the risk of fluctuating rates in the Singapore dollar. This will prompt the investment manager to trade the required currency pairs in due time to protect against the risk of currency movements.
These activities make up a large portion of the daily turnover in the currency trading market.
Other Forex Trading Strategies
There are other trading strategies for use in the currency trading market. By making use of arbitrage strategies, you would buy and sell a currency at slightly varying prices in the hope of making a small profit. This type of opportunity, although extremely attractive, is very rare in efficient market as there are so many traders who are on the lookout for these types of opportunities. This means that any possible arbitrage opportunities disappear quite rapidly. To take advantage of this opportunity, you need to be alert and monitor the market very closely. As soon as the opportunity arises, you need to take action. As the price differences are normally very small, you will need to trade larger lots or use leverage to increase your profit level.
The carry trade strategy is another popular method. This strategy involves the sale of a currency with a low interest rate and the purchase of a currency with high interest rates. As long as the two currencies maintain this high-low relationship, you will make a profit. This strategy is more suitable during low volatility periods. When there is high volatility the fluctuations in currency values could put your trade at risk.
These are but a few of the forex trading strategies available to you. You should determine the one that best suits your trading style before you implement and use it.