Today, the global currency exchange is only a click away. Traders use sophisticated software to analyze the market and make profitable decisions. There is no single strategy for success.
Retail trading emerged in the mid-1990s. Since then, the trading community has come up with multiple systems. Some of them are more complex than others. Here are a few examples.
How Advanced Should You Get?
Beginners in India should start with simple methods. Get used to the market conditions, open a live trading account, and play it safe until you feel confident. The basics include technical and fundamental analysis and risk management. Trading is always risky, and hedging tools are vital.
The most basic way to protect oneself is through Stop Loss. It gets you out of a losing trade at a predetermined level. The instrument prevents excessive loss, and it is found on all popular Forex platforms. Every trader should use it, especially at the beginning of their career. Professionals apply more complex methods, such as the following.
1, Trading Forex Options
An option is a special agreement. You express your wish to purchase or sell a currency pair at a particular price on particular expiry date. This is a right, not an obligation. Therefore, traders can use options for risk management purposes.
Suppose a trader goes long on EUR/USD when the price is 1.40. The instrument is likely to lose value overnight, dropping to 1.38. The trader places Stop Loss at 1.3750, accepting a potential loss of 250 pips.
Risks may be hedged via an FX option. There are two types: call and sell. An option to sell is referred to as ‘EUR put/USD call.’ The strike price for the overnight option is 1.3750. Essentially, the trader has placed a bet on a downward trend.
The currency option costs a premium. If the pair rises above the strike price (1.3750) without touching it, the premium is lost. But what if the prediction is correct? If the pair falls below the strike price touching it, the trader gets a profit from the option depending on the size of their premium. This profit covers part of the loss from the initial long position.
Options are used in both bullish and bear markets. Their prices are determined by the base currency. When the sentiment is bullish, buy calls and sell puts. When the sentiment is bearish, do the exact opposite.
2. Hedging Forex
Basically, you take both sides of the same trade. This requires initiating opposite positions on a currency pair. The most advanced hedges involve two pairs at once.
Suppose you want to profit using the USD/CHF pair. In fx trading, you can buy or sell the instrument by opening a long or short position, respectively. Learn more about the basics on the Forextime site.
A trader may short sell, but later find that the instrument is likely to gain value. This would make their position expensive. Thus, they use a pair with USD as quote currency (EUR/USD) that is moving in the opposite direction. This second position is also short.
The U.S. dollar gains value against the Swiss franc as anticipated. The short position on USD/CHF brings loss, while the short on EUR/USD brings profit. The negative effect is thereby minimized.
3. Position Trading
This approach is based on the average price and overall exposure. For instance, a trader goes short on EUR/USD at 1.45. If the pair drops but then rebounds to 1.47, they open another short trade. The average position is 1.46. If the pair falls below 1.46 again, profit is made.
Scalpers focus on highly leveraged short-term trades. Each can bring a profit of a few pips. Usually, the best time for scalp trades is right after a news release that will sway the market. Technical conditions are also important, as delays can disrupt the trading session.
A position can be open for seconds or hours depending on the goal. The style is attractive for many beginners. However, they soon understand that without a good strategy, scalping is detrimental to their balance. This style is inherently risky, and it is not advisable to make it your only approach. Incorporate it into a wider strategy with regard to your overall trading position.
Using Advanced FX Strategies
Seasoned traders consider many options before making a trade. This allows them to make a profit where others fail. Advanced systems require a risk management talent, and they must be used with caution. Learning to apply these strategies will give you an edge. However, avoid using them until you have mastered more basic approaches.