How Many Kinds of Main Strategies are there in Forex Trading?

There may be dozens of strategies in Forex trading. Let's just talk about the roots.

Nature Of Market:

Every thing in the universe has its NATURE. So is Forex market. So is every currencies pair in this market. For example, GBP/JPY always moves faster, and its wave range is longer than other pairs, such as a hundred pips during a day or even a hour. EUR/GBP generally waves narrowly several pips only within a day. For American, EUR/USD and GBP/USD like to sleep in day and dance at night. AUD/USD and NZD/USD look like twin, they commonly act in the same style, if one of they goes north, another one does not like to go south. But EUR/USD and USD/CHF are doomed to be enemy, while one of them flies up like a hydrogen balloon, the counterpart mostly will drop like a lead ball. And so on, so on.

Once we find this kind of "Nature of Market", we can develop and figure out some strategies for particular currencies pairs, just follow their nature, predict their moving direction and range. Then we will get our own trading strategy and system.

Fundamental Trading:

In Forex market, many professional analysts like to use a kind of method to predict the future. It is so-called "Fundamental Analysis". Based on this method, they develop many kinds of strategies to trade Forex. These are strategies of forecasting the future price movements of currencies based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the foreign currencies.

If you like to try Fundamental Trading, you need learn and understand a lot of finance knowledge. Actually, not only finance knowledge, you need to be interested at many things of this world, including politics, economy, geography, culture, diplomacy, even military affairs. And you need to study the core underlying elements that influence the economy of a particular entity. For example, when the USA's GDP or employment report is strong, you begin to get a fairly clear picture: the general health of America's economy is good. So the US dollar should be stronger than other currencies. But how far can the US dollar go? Fundamental Trading may not answer this question very accurately. You may need to come up with other precise tools as to how best to translate this information into entry and exit points for a particular trading strategy.

Hedge:

In finance, a hedge is an investment that is taken out specifically to reduce the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity.

In FOREX, there are two kinds of similar "hedging" strategies:

1, Buy and Sell the same currencies pair, same lots, same timing. Then let it go. While one of those orders goes north, the counterpart will go south. After the winner takes profit, we can wait for the loser turning around. In a yo-yo market, this method works well.

For example, buy 2 lots GBP/USD at 2.0003, at the same time sell 2 lots GBP/USD at 1.9997. While the rate rises up to 2.0053, we close the buy order and take profit 50 pips. Now, the sell order will draw down around 50 pips. Let's wait for the rate falling down, it will fall down usually, especially in yo-yo market environment. If the rate drops down to 2.0037, close the sell order, the sell order will lose 40 pips. Does it hurt? No. Don't forget the 50 pips we have taken at the buy order. Totally, we can get 50-40=10 pips. Furthermore, if the rate keeps falling, let's say down to 2.0027, we can take 50-30=20 pips, etc.

Some people would doubt it... doesn't this "strategy" sound like hedging flat for nothing, just paying double spread? Why bother? Well, they are right, because we forgot mentioning the key point: timing of closing orders. When to close the winning order to set a foundation and when to close the losing order to lock the profit, there are some tricks inside. Experienced traders use technical analysis skills to decide this vital timing. Believe it or not, those experienced traders say that this method helps them screening false signals out.

This kind of "Yo-Yo Hedge" can work at any currencies pair.

2, Buy (or sell) unequal lots of special currencies pairs and buy unequal quantities of another kinds of currencies pairs which usually move in the opposite direction. This seems a "Semi-Hedge" trading strategy. It is created based on "Correlation" between some particular currencies pairs. So it is not suitable for every currencies pair.

Actually, this kind of hedge has another feature: earning SWAP! You earn interest daily on the held position which can yield up to 50% per year of your full account balance.

There are several pairs can do it. Such as EUR/USD Vs. USD /CHF, GBP/USD Vs. USD/CHF, AUD/USD Vs. NZD/USD, EUR/JPY Vs. CHF/JPY, GBP/JPY Vs. CHF/JPY.

Let's take the EUR/USD and the CHF/USD pairs.

These pairs are historically negatively correlative 93-98% of the time. That is when one pair goes up the other goes down, and vice versa, up to 98% of the time. In a high leverage account (as high as 400:1 or 500:1), you could earn 50% SWAP interest in a year. How? Let's say you have $5,000 in your account and a 10% risk margin set. If the net interest we receive is 1.25% annually, this 1.25% interest will be enlarged to 50% per annum, by the 400:1 leverage.

And, this return does not include the buy low/sell high profits.

But, if the base of this kind of hedge collapses, it means the "Correlation" does not exist any more, for example the "Correlation" drops under 50% or lower, there will be a disaster.

Arbitrage:

Some people call "Arbitrage" as a risk free strategy. But other people call it as a trick which looks like the cat pawing chestnuts from a fire. But in theory, its risk is minimum in deed. We introduce three types of arbitrage strategies here:

1, Triangle Arbitrage: Searching for two highly fast-moving pairs (like EUR/USD and USD/JPY), the price of a not-so-fast moving pair like EURJPY should always be derived by multiplying (or dividing, etc) the fast-moving pairs. So for example, if EUR/USD is 1.4871 and USD/JPY is 108.24, the logical price of EUR/JPY should be 1.2 x 120 = 160.96. But at the same time, the real EUR/JPY rate is 160.90. The slower moving pair lags behind the logical price, and then profit opportunity comes.

In practice currencies are quoted with a bid ask spread, so a trader should be careful that he is actually buying at the quoted ask price, and selling at the quoted bid price. Other transaction costs, such as commissions, might also invalidate the apparent free lunch.

How to Trade Price Consolidations:

Trading on price consolidation breakouts is a popular choice among Forex traders. In this article, I will present to you one of the most effective and simplest ways to trade consolidations.

What Is A Price Consolidation?

Price consolidation occurs when there is no obvious uptrend or downtrend in short-term time frames. Ranging markets are not considered to be consolidating because prices are still fluctuating up and down. In a true consolidation, market prices don’t fluctuate and typically stay within a 10 to 15 pip range.

What Time Frames Should I Trade?

Consolidating prices don’t usually last very long. That’s why you’ll usually trade using intraday time frames (i.e. hourly charts or minute charts). Occasionally, daily charts may show flat prices as well… but these are more the exception rather than the norm.

How Do I Trade It?

Most people enter into a trade when prices break out of the highest price (or lowest price) of the consolidation. If prices break upwards, they buy. If prices break downwards, they sell. The decision to trade on breakouts is based on the assumption that the momentum of the break will be strong enough to push price further in the same direction.

How Effective Is It To Trade Breakouts?

In my experience, breakout trading can yield rather consistent profits. This is because they usually follow through. The hard part is deciding when to exit your trade once it’s in-the-money, because breakouts sometimes reverse directions quite quickly.

What Should Be My Profit Target?

Usually, a profit target of 30 pips is good enough. Sometimes, you may want to try for 50 pips. I don’t usually hold breakout trade positions after I’m in-the-money for 50 pips because then the price action will usually turn erratic.

Forex Trading Strategies and Forex Market Volatility:

Part of developing a profitable Forex trading strategy involves being able to determine market volatility. The Forex market is open 24 hours per day and you will find it impossible to keep track of all market activities, all the time. You will need to understand the timing of various markets, particularly those in which you are trading and those that influence your trades, so that you are in a position to make the best possible decisions during your trading hours.

Different markets are affected by differing market conditions. All currency pairs are subject to market volatility, but most currencies

tend to become more or less volatile during certain times of the day. As a trader, you will need to have some knowledge of the currency trading system

, currency pairings in different times zones and the conditions that affect their volatility.

The London market is the largest and most volatile Forex market in the world since some of the largest dealing desks of large banks are located there and transactions that take place usually involve large sums of money. The London market share is about 30% of all markets. The market hours are from 2 am to 12 pm EST, which is also the time for which most transactions are completed. The benchmark established for volatility is 80 pips and more than half of the London market currency pairings are likely to reach in excess of 80 pips. It would not be uncommon for the daily range of GBP/CHF and GBP/JPY currency pairs to average more than 140 pips. The ability of these currency pairs to generate huge profits in a short amount of time appeals to traders willing to take risks in the currency trading system.

Since most large market participants complete their circle of currency conversions during the London market hours, daily trade activities peak during this time, causing high volatility. Near the end of the London trading session most large investors will convert their European assets to US dollar assets in anticipation of the opening of the US market. This conversion is responsible for the increased volatility in GBP/CHF and GBP/JPY currency pairs. The New York trading session is the benchmark for US trading and it represents the second largest FOREX market. Trading hours are from 8 am and 5 pm EST. The majority of transactions occur in the US market from 8 am to noon EST. During this timeframe, the European market is still in session, which creates a market of high liquidity. Trading during this period of overlap accounts for about 70% of the currency pair trading in the European session and about 80% of currency pair trading in the US session.

Other currency pairs that appeal to high-risk traders during the London market hours include the USD/CHF, GBP/USD, USD/CAD and EUR/USD currency pairs. It is not uncommon for these pairs to reach a daily range of about 100 pips. This level of volatility creates opportunities for entry into the market. In contrast, is not uncommon for the AUD/JPY, EUR/CHF, AUD/USD and NZD/USD currency pairs to reach a daily range of about 50 pips. This level of volatility is more appealing to traders who attempt to avoid risks. The level of volatility indicates that these pairs may be less likely to create a loss.

The London market also overlaps with the Asian market. The Tokyo trading session is the benchmark for the Asian market. Trading hours are from 7 pm and 4 am EST. Large investors take positions in the Tokyo market in anticipation of the opening of the London session. The GBP/CHF and GBP/JPY currency pairs are also highly volatile during this time frame of overlap. Trading during the period of overlap, which is between 2 am and 4 am, is the lowest of any trading session. Traders use these slow trading hours to position themselves for the opening of the European or US market.

Stocks in Forex:

Forex involves brokers, which most investors will use as a stepping-stone to avoid risks. What these people do not realize is that brokers only handle limited aspects of the account, while it is up to the investor or trader to handle the rest.

Brokers will adhere to codes and stay up to date with trends in the market, particularly the Foreign Stock Markets. Brokers will often search for the best pips and spreads. Usually the person will calculate basics in low spreads, which are intended for buying or selling pips at higher stakes. The broker relies on this revenue.

He accepts this commission for handling your account. Some brokers in stocks is claimed to rely on earnings from your account, yet the broker only receives a commission. You should always examine the versions, advice, etc carefully before venturing into stocks.

For example, if the margins in the market have common lots, thus the weight could rank at one hundred to one. This means that the pips in the market are at the lowest rate, which is 1%. Now, this means nothing to the average person, yet those experienced in stocks, it means that the values of pips can rate at least $10, i.e. per unit and at the rate of 100,000.

The margins employ "mini lots." The lots open room for flexibility, which the value in pips at one buck at units of 10,000 can adapt easily per lot at averages of one hundred to one. The pip value would still be 1 percent, yet the size of the lots is what investors' bank on. Still, if the lots size flexes, it could facilitate easy access for traders in the market to identify with indentures size based no their own investments, which could be $1 low.

Stocks, including Forex trades involve intercontinental currencies, exchange markets, which risks are often high. The risks increase per person that joins the industry. In the market, buy and sell states play a large part, yet the high and lows factor into the weight bearings on buy and sell states. During this phrase, the high and lows can shift, thus the stakes could reverse, instantly scarring the traders in the industry.

Forex involves risks, so jumping ahead of the game is not an option for anyone unprepared to take these risks. Too many people lose in the stock market, so staying well versed is the option when you intend to venture into the stock markets.

The best chance anyone has in stocks is to play when the spirits are high. If you feel threatened, then stand back, since the highs and lows may not turn in your favor. Highs, lows shift, moving back, and forward, so learn before you are burned in stocks.