4 Methods of Forex Trading Explained

4 Strategies Traders Use to Profit on the Foreign Exchange

Pound Sterling with European Union currency exchange
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There are many different methods of Forex or foreign exchange market trading. All of them employ leveraging—basically the use of borrowed capital—to make money, and this has both an upside and a downside.

Leveraging makes it easier to make a lot of money while investing only a limited amount of your own capital. It also makes it easier to lose everything you've invested. Popular methods of Forex trading all come with their own benefits and pitfalls.

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 only comes with experience.

It can be prudent to open a practice or demo trading account first if you're just beginning to trade on the Forex. You can take a look at your results and see how you did after you've practiced for awhile. If you're making money, you might start trading with an actual account. Even then, you'll want to be somewhat conservative about how much money you're putting at risk, at least at first.

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 because it really is just a particular way of day trading, or it can approach the longer term "big picture Forex trading" method. Computers tend to do better at keeping track of the various mathematical components of scalping than an individual trader can, and most scalping is now done using some form of automation for that reason.

Big Picture Forex Trading

Big picture trading is the method of trading over longer timeframes. You're looking at currency pairs over days or weeks and trading on trends rather than on small movements in the market. There are many different specific methods within this general approach. 

Automated Forex Trading

There are several different ways to accomplish automated Forex trading.

All of them depend on signals given by a signal provider or they simply run an "expert advisor" program like 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, keep your emotions in check, watch your risk, and be honest with yourself when you're having trouble. Even professional traders don't like to admit when they're caught up in a losing streak or what's causing that losing streak. 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.

Note: Always consult with a financial professional for the most up-to-date information and trends. This article is not investment advice and it is not intended as investment advice.