Currency Trading Strategies

There are many strategies for trading forex. 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 in one way, currency trading strategies are like any other business strategies.

In any business, strategic planning involves answering questions about your current situation and where you want your business to go. It’s the same with setting strategies for your currency trading business. Consider these three questions and answer them fully and honestly.

which currency pairs will you trade?

This is a decision you make only after careful study of the various currencies traded. Some pairs are so volatile that their exchange rates vary many times in one day (called intra-day), while others remain fairly steady. As in any investment, volatile markets are risky, but their returns can be very high.

A common term 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).

Forex experts all have their own opinions about which currency pairs are most volatile. But here’s a guideline. Economic indicators in their own and other countries often affect currency prices. Any pair of currencies 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. EUR/USD is often considered one of the most volatile pairs, largely because the Euro is influenced by the economies of all European Union countries.

How long will you stay in a position?

This will depend in part on your answer to the first question, of course. Traders who like to trade in highly volatile pairs can be in and out of trades in minutes. This type of trading pattern requires constant vigilance, of course. 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 basic overview of currency trading strategies.