Forex trading has become a core part of the financial markets; with the high trade volume of $5 trillion, the market attracts traders from the world over. The market is highly active with online trading and market chances to make money. A trader can easily invest in the forex market through various online platforms such as exchanges, brokers and privately.
Traders of the forex market have to be knowledgeable and with a proper analysis of the market to earn returns. The forex market movements make it challenging for traders to predict the changes easily and make profits. To have a successful trade and overcome the fluctuations of the market, traders can use forex strategies to have a planned trade.
We have discussed the five most effective forex trading strategies that will help traders have a successful and smooth trading experience.
What is the Forex Market?
Forex market is a decentralised market that can be accessed from every corner of the world. The market is for 24 hours and is completely online for trade; investors can easily trade in various international currencies to make profits. Forex is a contraction for the foreign exchange market, which deals in foreign currencies and identifies the exchange rates.
In forex trading, the buyers and sellers of the market trade currency between each other at an agreed price. The main traders of the forex market are global banks, financial institutions, companies and individuals who convert the currencies into other currencies, which is termed as the forex transaction.
For example, when we travel abroad, we have to exchange the currency into the country’s currency we are travelling to. It is the most simple way of forex exchange; however, in the trade, it could be for several other reasons. Traders may exchange currencies for goods or services, for futures or options contracts etc.
The main motive of forex trading is to earn a profit, and forex trading has active market trading with high volume trade. However, the market is highly risky as well due to the volatility.
Forex Market Operations
In forex market trading, the trade is not based on exchanges like stock markets traders invest in the currencies through an over-the-counter system. In this, a trader can invest through a broker or privately, whichever suits their requirements. There are numerous online brokers that offer the best facilities and services to aid traders for successful forex trading.
Traders can even speculate on the prices of the currencies through forex trade. The online brokers have all that a trader needs; some of the regulated and famous online brokers are, PrimeFin and ETFinance. Traders along with these have the option to trade in CFDs, ETFs and other derivatives to manage the risks of the trade.
Forex market is of three types, the spot market, the futures market and the forward market. A trader can use any of the three to invest in the forex market.
The spot forex market deals in currencies between two parties on a fixed date and time, which is not more than two days. The date fixed for the trade in a spot market is called the spot date. Thus, the trade is for a short period of time and has a physical exchange of the currencies.
The futures contract is a legally binding trade between the parties of forex. The two parties exchange the currencies or the goods or services at a specified price and date. The buying and selling of currencies are set at a certain price and cannot be moved in the range of future dates. This feature of futures contracts makes it different from forward contracts.
The forward contract is similar to futures contracts, where traders buy and sell the currencies at a specified date and price. However, the date of trade could be moved within a range of dates as per the suitability of the parties.
Base and Quote Currency
To understand forex trading, it is important to know about the base and quote currency concept. A significant difference that makes the whole forex trade possible. Forex trade works on the worth of the base and quote currencies, which together make a currency pair for trade.
In the forex market, traders usually trade in currency pairs to earn profits; the one unit of a base currency identifies the price of the quote currency. The base currency is the upper and the first currency mentioned in the currency pair; on the other hand, the second and lower currency in the currency pair is the quote currency.
Traders buy the currency pairs to invest in the forex market and make most of the trade opportunities. Forex traders buy and sell the currency pairs to that is one currency is purchased, and other sold, making it a currency pair.
The price of the currency pair is decided by one unit of the base currency in worth with the quote currency. Base currency is higher and has more market value in comparison to the quote currency; however, this may differ sometimes.
The currency pairs are coded with three initial letters of the currency for easy identification of the traders. Forex trade has divided the currencies into three groups, major, minor and exotic.
The major currency pairs are those which have high market worth and are traded frequently in the market. In contrast, minor currency pairs are totally opposite of major currencies and have less frequency in the forex market.
Exotic currency pairs are the ones that have major currencies and emerging economy currencies. Thus, a high value and small value currency pair.
How to invest in the Forex market?
For investing in the forex market, traders need to know and understand the market well before jumping in. We have understood about the forex market, its trading and working. But, how do we invest in the forex market?
Here, we have the steps that traders can follow to invest in the forex market:
- The initial step of forex trade is to open an account with a regulated broker like PrimeFin. For opening an account with brokers, traders have to register with the broker through a form. On the official website of the broker, traders can fill a form by providing details such as email address, name and contact number. Moreover, traders set a password for the security of their accounts.
- In the following step, traders provide traders with the information asked by them, such as documents available and occupation etc.
- The third step is to questionnaire, where traders answer the questions regarding previous trade experience, if any.
- The fourth step involves uploading the documents available with the trader for verification purposes. Brokers verify the trader for secure trading. Traders can choose their account type as well.
- The last step of investment in forex trade is to deposit the funds, to begin with, the trade. Traders have to deposit minimum funds required, or there is no specification by the broker that traders can deposit as per their wish. The account is created, and traders can begin their investment in the currencies.
Forex Trading Strategies
By going through the article here, we understand that forex trading is not an easy task. Traders have to be experts or research and analyse well before trading. However, there’s one more key point that traders need to incorporate in the forex trade to be successful.
Forex trading strategies are essential for a good plan and trade; if traders know what to do and when to do it, they can manage the trade effortlessly. There are several forex trading strategies in the market. A trader can choose one that suits their need and instrument.
In the paragraph are discussed five killer forex trading strategies that will help investors have a profitable investment. So, let’s begin and study the strategies of forex trading.
Trend Trading Strategy
The simplest forex trading strategy is trend trading; it is a style of trade in which traders study the momentum of forex trade. The movement of the trade in a particular direction helps traders invest and know that the market will increase or decrease. Thus, helping them in predicting better.
The price of the currency, when moving either up or down, gives traders an idea of market trends. Traders can enter into a long term market position when the currency is trading upwards. There are higher swing lows and higher swing highs in an upward trend.
In contrast, a short trade position is preferred when the market is down, and there are fewer chances of good profits. The swings of the short trend are lower swing lows and lower swings highs.
The assumption of trend trading is that the currencies will move continuously in the same direction as per the current trend. The strategy includes take-profit and stop-loss orders for trading.
A long term trade strategy, position trading, is focused on the fundamental factors of the market. The strategy is good for all market types and does not consider the small market fluctuations. One of the popular trade strategies that allow traders to hold the currencies for a long period of time.
The profit earned from the position trading is high, which makes it a preferred forex trade strategy. However, the risks are also high in such strategies. There are many position traders, such as Philip A. Fisher. These hold the position for long and earn high profits by studying the market movements of the currency.
Position traders are not active traders and believe in trading for long at a position. They use the technical and fundamental analysis both to make decisions with other factors in mind.
Day Trading Strategy
A day trade is one that opens and closes with the market, thus a day’s trade. There are many experts and professional traders who use day trading strategies to earn high profits from the forex market. The financial instruments are traded in a day; traders can hold a single position throughout the day or can hold multiple positions depending on the trader.
The trade is usually short, as it could be for a minute or for some hours and not more than that. Day traders are usually market experts and understand the forex market well to make money.
Day traders have several potential opportunities if they trade with researched data and a focused mind. However, the risks are also high for day trading, and the profits are generally small.
Scalping forex trade strategy is similar to day trading as it is also a short time strategy. But still, it is different from day trading as scalping believes in short trades ranging from a second to a minute highest. Traders have to be quick with their conclusions and good market readers.
The profits from scalping are small but altogether make a huge profitable trade for the forex investors. Traders can use this manually or through an algorithm, which is usually provided by the trading platforms nowadays. Working on mathematical formulas, the scalping strategy is better used with trading platforms as it takes a lot of time to trade manually.
Using scalping, traders can decide when and where to enter and exit the market and prefer to trade with highly liquid currency pairs.
Swing trading strategy is a useful trade strategy that takes small profits from the short trends of the market. The gains of trade are small but are beneficial in the long run. Traders can study the market swings formed and accordingly take decisions. Swing traders hold the market positions for a period of a few hours or a couple of days depending on their need but do not exceed more than a month or a year.
The focus of swing trading is to generate good gains from the trade within five to ten days and not to invest for longer. Traders have to study the market, its technical and fundamental aspects to have correct market predictions and make profits.
Trade has been a source of income for many, and to invest in highly liquid and volatile markets, it is necessary to use these strategies. A trader cannot succeed without the use of proper research and known strategy. Strategies play a vital role for traders as they help traders predict the movements and trade.
However, a trader has to be expert and well researched to trade in the forex market with strategies.