The different types of forex trading strategies

Establishing the strategy you want to implement to try and make a solid return from your forex trading can be a precarious field to navigate, especially if you’re looking to attain any level of success. Before entering any market and dealing with any asset, you must know that markets are volatile. Even if you understand the nature of what you’re investing in, several factors can combine and result in you losing your investment.

There are several ways to build your knowledge of trading forex. You can educate yourself using verified materials provided online by educational institutions, and learn about terms such as FX structured products. In addition, you can use demo software to gain a feel for how a trading platform operates in a live market, and you can also supplement your knowledge with other learning tools, such as a trading quiz.

Swing trading

If you’re just starting as a trader or investor, swing trading is one of the easier methods to learn. This doesn’t mean it is guaranteed to return a profit – it just means it is a simpler strategy to understand. When a market dips low and then rallies high, swing trading relies on trying to time the asset at the bottom of this cycle and then holding it for anywhere from one day to several months, to sell at a profit. In theory it is much simpler than carrying it out in practice. 

The downside is that you are open to risk throughout the weekend and overnight markets, as forex trading is a 24-hour market. For example, the stock market operates during business hours. However, forex and cryptocurrency markets are open 24/7. This has also led to questions regarding regulation as it stretches across international borders.

While this can provide a better opportunity for some traders, swing traders experience the volatility on a grander scale. It is important to focus on your initial entry and exit price more than the emotions that trading can evoke.

Scalp trading

If you’re trading over a short period, scalp trading is one of the more popular methods. Institutional and retail investors will implement this method to try and maximise profit in the short term. 

Scalp trading involves taking advantage of fractional price changes in an incremental time. Some scalp traders will make dozens of trades throughout the day. The benefit of this type of trading is that risk is minimised because the position is only live for a short period.

Investors who employ this strategy will usually use automatic buy and sell targets to help execute their trades more effectively. However, this strategy requires high concentration on markets and selling in intervals when you see an opportunity. This isn’t a method that is generally used by beginners and is better suited to more experienced traders.

Arbitrage trading

Arbitrage trading is another fairly complex method. This involves traders taking advantage of price differentials on different markets. Some exchanges will show slightly different prices at the same time – if a trader can identify these differences and make a profit by trading between the two, this is the essence of an arbitrage trade.

Although it may seem too easy to be true, trading often and switching between markets can take time and incur fees. Identifying a price difference and successfully executing an arbitrage trade are two different skills.

Options trading

A buy or sell option is when a trader sets up an agreement to purchase an asset at a chosen future price. Although the agreement is set up, it is not set in stone and the options trader doesn’t have to purchase the asset, despite the prior agreement. It can be beneficial to trade in this way as you rely on speculation. 

If your hunch pays off, you get to purchase the asset at a price that gives you an advantage over other types of trading. If a trader keeps up to date with the news and suspects that the price of a specific currency might dip due to particular news, an options trade could be the primary method to use as part of their strategy.

Conclusion

There are several different trading strategies. When it comes to forex trading, there are dozens of potential strategies that you can use, and you can also use these strategies in other markets, such as cryptocurrencies, commodities and stocks. A strategy should also consider other market conditions, such as sentiment and the risk appetite in the market at that particular time.

We have discussed a range of strategies today, and some of these strategies are better suited to expert traders or traders with more experience in these markets. However, if you learn how the markets and different strategies work, you are starting in the best way on your trading journey.