Strategies for Trading Forex

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There are many strategies  you can use for your currency trading. You can find lots of free explanations online, and you can also pay substantial sums of money to learn these strategies. Good currency trading strategies are definitely a good investment.

But right now I want to talk about currency trading strategies in a similar way to any other business strategy.

In any business, strategic planning involves answering questions about your current situation and where you want your business to go. The same steps apply to setting strategy for your forex trading business — here are three questions to answer as you begin to set your currency trading strategies.

which currency pairs will you trade?

This is a decision you make only after careful study of the various currencies traded. Volatility levels are high in some pairs and lower in others. As in any other type of market trading, volatility usually means more risk if you’re not on top of things, but it also can mean more profits if you are.

A term you need to understand in forex trading is “pip”, which stands for percentage in points. A pip is the smallest price increment in forex trading. In the forex market, you’ll see prices quoted to the fourth decimal point (except for the Japanese Yen, which is quoted to the second decimal point). As an example, Europs to U.S. Dollars (EUR/USD) could be bid at 1.1915 and offered at 1.1918. In such a case, the “spread” (or difference) is 3 pips (1.1918 less 1.1915).

If you ask experts which pairs are most volatile, you’ll get many different opinions. But here’s a guideline. Currency prices are often affected by economic indicators, both in their own and other countries, and any pair is affected 50% by each half of the pair. So in EUR/USD, for example, you’ll be affected 50% by the Euro and 50% by the U.S. Dollar. Since the Euro is affected by economic indicators in all the countries that use it as currency, it tends to move around a lot. For this reason, EUR/USD is often considered one of the most volatile pairs.

How long will you stay in a position?

Of course this will partly depend on your choice of currency pairs to trade. Traders who like to trade in highly volatile pairs can be in and out of trades in minutes. Of course, to do that you’ll need to be on top of things all the time. You can do this yourself, or employ a forex trading robot.

You’ll no doubt want to explore robot use at some time, but for now if you want to do the monitoring yourself, you should probably trade in less volatile currency pairs.

Under what conditions will you exit the position?

An important part of currency trading strategies is deciding under what circumstances you will exit a trade. You can choose between a take-profit strategy (T/P) or a stop-loss strategy (S/L).

If you place a stop-loss order with your broker, you will set the prices at which you no longer wish to be in the trade because of the possibility of loss. Your position will automatically be converted to a market order to sell if the pair reaches that stop-loss point.

The opposite exit strategy is take-profit, in which case you place a limit order. The order to sell automatically kicks in when your stated profit point is reached with the pair. This ensures you can take a profit and get out of the trade before it begins to lose.

This is a simplified summary of currency trading strategies.


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September 27, 2009 · Filed Under Currency Trading

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