Methods of Forex Trading

4 Strategies Traders Use to Profit on the Foreign Exchange

Pound Sterling with European Union currency exchange
Fanatic Studio/Getty Images

There are many different methods of Forex trading or foreign exchange market trading. All of them employ leveraging -- basically, the use of borrowed capital -- to make money. This has both an upside and a downside. Leveraging makes it easier to make a lot of money with a limited amount of your own capital. It also makes it easier to lose everything you've invested. Below is a list of some popular methods of Forex trading, with the benefits and pitfalls of each briefly described.

 

1. The Forex Day Trading Method

Day trading is short-term trading based on technical indicators along with judgments about the impact of breaking news. It requires some reasonable amount of skill, which usually comes only with experience. If you are just beginning to trade on the forex, it's prudent to open a practice or demo trading account first. After you've practiced trading for awhile, you can take a look at your results. If you're beginning to make money, you might start trading with an actual account. Even then, it's prudent somewhat conservative about how much money you're putting at risk. Read More >>

2. Scalping

Scalping is a forex trading method that relies on very small gains from very large trades. It can look a lot like day-trading -- basically, just a particular way of day-trading -- or it can approach the longer term "Big Picture Forex Trading" method described below. Computers tend to do better keeping track of the various mathematical components of scalping than an individual trader and for that reason, most scalping is now done using some form of automation -- the last of the four forex trading methods described in this article.

3. Big Picture Forex Trading

Big picture trading is the method of trading over longer timeframes -- looking at currency pairs over days or weeks and trading on trends rather than small movements in the market. Within this general approach, there are many different specific methods.

4. Automated Forex Trading

There are several different ways to do automated forex trading.

All depend on signals given by a signal provider or simply run an "expert advisor" program, such MetaTrader, that trades based on alerts and trading recommendations built into the software. Some experienced forex traders regularly use these programs and recommend them, while others believe they can do better responding to actual conditions that a computer program can only approximate. As with other forex trading methods, it's wise to begin automated trading in a practice account and take appropriate actions based on your results. 

Some Practical Advice

No matter how you plan to trade, you need to keep your emotions in check, watch your risk, and be honest with yourself when you are having trouble. Even professional traders don't like to admit when they are having a losing streak, or what is causing it, but it only hurts your bottom line when you don't face problems. That's a bit of a general business principle, but it strongly applies to trading.

Continue Reading...