If there is one feature that defines the forex market, it is liquidity. This describes the degree to which assets, securities and derivatives can be bought and sold quickly, without compromising on the price of the underlying assets.
The forex market has a high level of liquidity, which along with considerable volatility creates a challenging, if potentially lucrative, environment for traders to operate in.
To cope with this, you will need to explore the numerous forex trading strategies that exist, before choosing the one that best suits your outlook, philosophy and your selection of currency pairings. Here are your main options as a forex trader:
1. Day Trading
As the name suggests, day traders open and close positions within the same 24-hour period, as they look to secure several quick and incremental profits that help them to accumulate wealth.
While day traders will not necessarily trade for the duration of the day, they will execute multiple orders throughout the three session that exist on the forex market. Due to the nature and the frequency of day trading, it is important to focus on the precise selection and timing of your orders, making it ideal for more experienced investors with a knowledgable and agile mind-set.
This type of strategy may also appeal to risk-averse traders, as it offers minimal market exposure and delivers quick profits across a number of individual orders.
2. Swing Trading
For some, the minimal nature of day trading profits and its demand for accurate orders may prove a little too much. In this instance, swing trading may offer a more palatable option, as this is a short to intermediate strategy that can last for anywhere between one and 30 days.
Traders who leverage this vehicle tend to initiate a couple of trades during the course of each week, while they also identify patterns using hourly charts and confirmation from weekly data. This method of investment can deliver an appealing risk to reward ration, thanks primarily to the identification of potentially lucrative trends.
Relatively inexperienced traders may be drawn to swing trading, as there is less of a requirement to spend time glued to the screen and investors do not need to react as quickly to market events. The do require discipline, focus and a willingness to make execute larger, single trades, at least if they are to generate a viable return.
3. Position Trading
Finally, we come to position trading, which may also be referred to as trend trading depending on where you are in the world. It is best described as a ‘buy and hold' method, through which open positions can be held for an indefinite period of time and even during periods of minor retracement and depreciation. The ultimate goal is to buy and sell in relation to predetermined trades, with assets eventually sold at a time when their value has increased and reached a desirable level.
This method of investment requires a clearly defined strategy and an appreciation of the underlying laws that govern change in the market, while position traders typically only open a few positions each month.
While this delivers the best risk to reward ratio and can deliver large profits over time, it does open up your capital to far greater market exposure and the threat of potential losses. This is why you cannot afford to trade with any semblance of emotion, as you must stay true to your strategy even during times of sustained decline and depreciation.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.