How many kinds of main strategies are there in Forex Trading?
There can be lots of strategies in Forex trading. Let us just talk about the roots.
Nature Of Market:
Everything in the universe has its NATURE. Then there is the Forex market. Then all currencies pair in this market. For example / GBP JPY always moves faster, and its wave range is longer than other couples, as hundreds of cores within a day or even an hour. EUR / GBP generally waves narrowly several pips only within a day. For American, EUR / USD and GBP / USD like to sleep in the day and dancing at night. AUD / USD and NZD / USD look like twin, they usually act in the same style, if one of those going north, is another not want 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 fall like a lead ball. And so on so forth.
When we find this kind of "Nature of Market", we can develop and find out some strategies for particular currencies pairs, just follow their nature, predict their moving direction and range. Then we have our own trading strategy and system.
Fundamental Trading:
In the Forex market, as many professional analysts to use a sort method to predict the future. It is called "fundamental analysis". Based on this method, develop the many different kinds of strategies for trading Forex. These are strategies for planning future price of currencies based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of any underlies the foreign currencies.
If you like to try Fundamental Trading, you must learn and understand a lot of finance knowledge. Indeed, not only finance knowledge, you must be interested in many things in this world, including politics, economics, geography, culture, diplomacy, even military affairs. And you have to explore the key underlying elements affecting the economy of a particular entity. For example, when the U.S. GDP or employment report is strong, you begin to get a fairly clear picture: the general health of the U.S. economy is good. So U.S. dollar should be stronger than other currencies. But how far can the dollar go? Basic Trading may not answer this question very precisely. You may need to come up with other precise tools as to how best to translate this information into entry and starting points for a particular trading strategy.
Hedge:
In finance, a hedge an investment that is taken out specifically to reduce the risk of another investment. Hedging is a strategy to minimize exposure to an unwanted business risk while still allowing the company to benefit 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. So let it go. While one of those orders goes north, the counterpart to go south. After the winner takes profit, we can wait loser spin. In a yo-yo market This method works well.
For example, buy 2 lots GBP / USD at 2.0003, while sell 2 lots GBP / USD at 1.9997. While the rate rises to 2.0053, we close the buy order and take profit 50 pips. Now sell to go down around 50 pips. Let us wait for the rate to fall, it will fall down usually, especially in the yo-yo market environment. If the rate falls to 2.0037, close the sell order, sell order will lose 40 pips. Does it hurt? No. Do not forget the 50 pips we have taken on the purchase order. Absolutely we can get 50-40 = 10 pips. Moreover, if the rate includes decreasing, let's say down to 2.0027, we can take 50-30 = 20 pips, etc.
Some people would think that it … not this 'strategy' sounds as hedging flat for nothing, just to pay double spread? Why bother? Well, they are right because we forgot to mention the key point: timing of closure orders. When to shut winning aims to establish a fund 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 crucial timing. Believe it or not, those experienced traders say that this method helps them screening false signals out.
This form of "Yo-Yo Hedge" can work in any currency pair.
2, Buy (or sell) unequal lots of special currency pair and buy unequal quantities of a different kind of currencies pairs which usually move in the opposite direction. This seems a "Semi-Hedge" trading strategy. It is created on the basis of "Correlation" between some particular currencies pairs. So it is not suitable for all currencies pairs.
Actually this kind of hedge has another feature: earning SWAP! You earn interest daily on the post, which can provide up to 50% per year of your full account.
There are several couples 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 CHF / USD pairs.
These pairs are historically negative correlative 93-98% of the time. It is when a couple 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 can earn 50% SWAP interest for a year. How? Let's say you have $ 5,000 in the account and a 10% risk margin. If net interest we receive is 1.25% annually, this 1.25% interest will be expanded to 50% per year, as 400:1 leverage.
And going back does not include buying low / sell high profits.
But if the basis for this kind of hedge collapses, it means "Coherence" no longer exists, for example, "Correlation" drops below 50% or less, there will be a disaster.
Arbitrage:
Some people call "Arbitrage" as a risk free strategy. But other people call it as a trick that looks like the cat pawing chestnuts from a fire. But in theory the risk at least in deed. We introduce three types of arbitrage strategies here:
1, Triangle Arbitrage: Searching for two highly fast-pairs (as EUR / USD and USD / JPY), the price of a not-so-fast moving pair like EURJPY should always be calculated by multiplying (Or dividing, etc.) rapidly couples. So for example if EUR / USD is 1.4871 and USD / JPY is 108.24, the logical price EUR / JPY should be 1.2 x 120 = 160.96. But same time / real EUR JPY rate is 160.90. The slower moving pair lags behind the logical price, then profit opportunity comes.
In practice currencies are quoted with bid ask spread, then a trader must be careful that he actually buys at the specified ask price and sell to the quoted price. Other transaction costs such as commissions, can also lead to the apparent free lunch.
Several pairs:
AUD / CAD CAD / JPY AUD / JPY
AUD / CAD GBP / CAD GBP / AUD
AUD / CAD USD / CAD AUD / USD
AUD / CHF CHF / JPY AUD / JPY
AUD / CHF GBP / CHF GBP / AUD
AUD / CHF USD / CHF AUD / USD
AUD / JPY EUR / JPY EUR / AUD
AUD / JPY GBP / JPY GBP / AUD
AUD / JPY USD / JPY AUD / USD
AUD / USD GBP / USD GBP / AUD
AUD / USD USD / CAD AUD / CAD
AUD / USD USD / CHF AUD / CHF
AUD / USD USD / JPY AUD / JPY
CAD / JPY EUR / JPY EUR / CAD
CAD / JPY GBP / JPY GBP / CAD
CAD / JPY USD / JPY USD / CAD
CHF / JPY EUR / JPY EUR / CHF
CHF / JPY GBP / JPY GBP / CHF
EUR / AUD AUD / CHF EUR / CHF
EUR / AUD AUD / JPY EUR / JPY
EUR / AUD AUD / USD EUR / USD
EUR / AUD GBP / AUD EUR / GBP
EUR / CAD AUD / CAD EUR / AUD
EUR / CAD GBP / CAD EUR / CAD
EUR / CAD USD / CAD EUR / USD
EUR / CHF AUD / CHF EUR / AUD
EUR / CHF GBP / CHF EUR / GBP
EUR / CHF USD / CHF EUR / USD
EUR / GBP GBP / AUD EUR / AUD
EUR / GBP GBP / CAD EUR / CAD
EUR / GBP GBP / CHF EUR / CHF
EUR / GBP GBP / JPY EUR / JPY
EUR / GBP GBP / USD EUR / USD
EUR / JPY GBP / JPY EUR / GBP
EUR / JPY USD / JPY EUR / USD
EUR / USD GBP / USD EUR / GBP
EUR / USD USD / JPY EUR / JPY
GBP / JPY USD / JPY GBP / USD
2, Hedging Arbitrage:
This technique is the safest ever and the most profitable of all hedging relationship techniques simultaneously with minimal risks. This technique uses arbitrage of roll over interest rates (SWAP) between two brokers.
One broker which pays or charges roll over interest rates by end of the day, and others should not charge or pay this kind of roll over SWAP interest. The main idea of this type of Hedge Arbitrage is to open a position of currency (Submitted example, the highest SWAP GBP / JPY) at a broker who will pay you a great interest for every night position forward and to open a back that position in the same currency with broker may not charge interest on commercial exchanges. This way you will gain the interest or SWAP that is credited to your account without risk.
3, Netting Arbitrage:
The main idea behind the strategy is, using differences between cross rates (eg EUR / USD, GBP / USD and EUR / GBP) at different markets.
For example, suppose you had opened the following positions:
buy 1 lot EUR / USD at 1.4867;
sell 1 lot EUR / GBP at 0.7600;
and sell 0.76 lot GBP / USD at 1.9586.
The netting / clearing gives the following results:
Long EUR from the first pair and short EUR from the second pair gives zero exposure in EUR.
Long position in GBP from the second pair and short position from the third pair gives zero exposure in GBP.
Short position from the first pair ($ 148,670.00) in USD and long position from the third pair ($ 195,860.00 * 0.76) in USD gives you $ 183.60 profit without open positions and exposures.
Simple? Not really for small traders can be for them, "Big Brothers" only. Because it's really hard to play spread, slippage, stop loss hunting or so on games against brokers.
Carry Trading:
Carry trade is a well-known trading strategy which an investor sells a certain currency with a relatively low rate and use the funds to buy another currency with a higher interest rate. Then this investor can make money on the difference between these two interest rates.
JPY is currently considered to be the most popular currency to use the low interest offers currency carry trade, because interest rates are the lowest world almost 0th And GBP is currently considered to be the high yielding currency. So are NZD and AUD.
When we buy currency pairs: GBP / JPY AUD / JPY, GBP / CHF, USD / JPY or EUR / CHF;
Or sell: EUR / AUD, EUR / GBP, AUD / NZD;
Both actions can produce positive SWAP rollover interest. When combined with certain kinds of hedge trading, we can do as high as 100% profit annually and keep the risk low.
The big risk in a carry trade is the uncertainty of exchange rates. Moreover, these transactions are generally performed with a high leverage, so a small movement in exchange rates can result in huge losses unless hedged properly.
Martingale:
Originally, martingale referred to a class of betting strategies popular in the 18th century France. In forex trading, strategy, let the operator double his / her order lots after every loss, so that the first win would recover all previous losses plus win a prize corresponding to the initial investment. In the example below you bought one lot EUR / USD at 1.4650. Unfortunately, the rate drops. You play it in martingale way, "double down ", buy two lots, you need the EUR / USD to rally from 1.4630 to 1.4640 to break even. As the price moves lower and you add four lots need you only have to join 1.4625 instead of 1.4640 for a breakeven. The more lots you add, the lower your average entry price. Although you can lose 100 pips on the first lot of the EUR / USD if the price hits 1.4550, you only need the currencies pair to reach 1.4569 to break even on your entire holdings. When the rate goes up even a pip, you will gain a lot.
EUR / USD Lots Average or Breakeven Price
1.4650 1 1.4650
1.4630 2 1.4640
1.4610 4 1.4625
8 1.4590 1.4605
16 1.4570 1.4588
1.4550 32 1.4569
The Martingale strategy needs a very strict money management, and you must understand that initially the money will come slowly, but if you lose patience and raises the risk level up to much, do not hang on to late to see the turnaround.
Anti-Martingale:
The anti-martingale strategy is the opposite of the more famous Martingale approach. This approach instead increases order lots after wins, while those after a loss. Use an anti-martingale risk management scheme will increase profits during the period when a trading approach works well while automatically decreasing exposure in parts of the cycle where trading is unprofitable. This is believed to reduce the risk of ruin for trading.
Grid:
Basically the operators with a set of entry limit orders X pips from current price, for example 15 pips. Some experienced traders like to use the Fibonacci Series Numbers (0, 1, 1, 2, 3, 5, 8, 13, …) or Golden Section Numbers to make this network. When the price level frameworks limit order is executed. Then every 15 pips there is a second warrant price limit executed. And so on. In a yo-yo market, while the price moves up or down always be some limit orders executed. Once the order is taken profits and the price moves to its original level again, a new limit on out again, then repeat the same process. Just open orders and take profits in a set of "grid". It's simple and easy, but hard to deal with when and how to close all orders, especially Stop Loss. Some experts says we do not need to stop loss, but will you take a chance to keep your all positions till "margin call?"
Day trading:
This refers the practice of buying and selling currency pairs, so that all positions will usually be closed within the same Forex trading. Day trading idea comes from stock market. Day traders rapidly buy and sell shares throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits. Day trading is extremely risky and can result in significant economic losses in a very short period. Under the rules of NYSE and NASD, "Customers that are considered pattern day trader" must have at least $ 25,000 in their accounts and can only trade with margin accounts separately.
But in the Forex market can each be one day trader to do day trading. Actually more than day trading, they can do "scalping".
Scalping:
Scalping is a trading style where small price gaps created by the bid-ask spreads are exploited. It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds. It means to try to get a few points (1 ~ 3 pips only, no greed, no long-term) out of the market every time. This strategy is based on a fact: approximately 70-80% of the time that the market is in a consolidation pattern. This means that for most of the time, the market is not making big moves. For example, closed after the U.S. market is, and before the European market is open, the Forex market tends to range in a consolidation channel for hours at a time before the second major move in one direction. This kind of market behavior pattern is ideal for Forex scalping. Every time you go into the market, waiting 10 or 20 minutes when you have multiple cores win as cash and go.
Scalping has some features:
1, Lower exposure, lower risks. Scalp is only exposed in a relatively short period.
2, Smaller moves, easier to achieve. The normal wave of the market will give you several pips easily.
3, Large volume, adding profits up. Since the profit obtained per share or contract is very low because of its goal of diversification, they need to act much to add up the profits. Scalping is not suitable for small-capital-employed.
But be careful, not every broker welcomes this kind of scalping strategy. If you scalp it too quickly and thin, let's say you just hit 1 pip every 2 or 3 minutes then run and repeat it again and again within a day, every day, you feel high, eh? But the broker are not happy and bans you. You will be thrown out because of your successful scalping!
Break-out:
Using Bollinger Bands indicator on a chart we will find all the Forex currency pairs are waving in a "band", or a channel. By finding major support and resistance levels with technical analysis, a Break-Out strategy trader will buy this pair at the lower level of support (bottom of the band / channel) and sell them near resistance (top of the band / channel). Until now, no a Break-Out yet.
When the price breaks the upper range line with larger-than-average volume, or the opposite: the price breaks the lower range line with larger-than-average volume, the chance comes. The idea behind this strategy is that when a currency pair breaks out of the canal, it usually experiences a large price movement in direction of breakout. So buy it at the price breaks the upper line and continue to keep it until it has risen a distance comparable to the height of the range. If it goes down instead, stop losses as it penetrates the upper bar. Or sell it to the price breaks the lower range line and continue to hold it until rate has fallen a distance equal to the height of the range. If it goes up instead, stop losses as it penetrates the lower range line.
Pivot:
Besides Support and Resistance levels that many foreign exchange traders want to use another indicator to analyze and predict currency pairs' price changes, it is known as Pivot Point. To calculate and analyze the pivot is a subset of technical analysis, this bench mark, traders can locate rotation point in development, and it is very useful to decide when and where to buy or sell.
Classic Pivot Point, Support and Resistance Formulas are as follows:
Look at any figure, pivot is an average of the previous bar's high, low and closing prices. In the formula, "H" represents the previous bar high "L" represents the previous bar low, and "C" represents the previous bar's closing price.
Current Bar's Pivot Point (P) = Previous Bar's (H + L + C) / 3
First level of support and resistance can be calculated as follows:
First Resistance Level (R1) = (2 * P)-L
First Support Level (S1) = (2 * P)-H
Similarly, the second level of support and resistance:
Second Resistance Level (R2) = P + (R1-S1)
Second Support Level (S2) = P (R1-S1)
As many currency pairs tend to fluctuate between Support and Resistance levels and These levels are calculated based on Pivot points, so when a trend or breakout trader knows how pivotal is that it will enable him / her to find out key levels that need to be broken for a move can be described as a breakout.
News Trading:
The system is developed based on economic news events from around the world. Nearly half of those announcements have moved the market significantly. Before a big news coming, we can buy and sell some currencies pairs on the same time, same lots stop loss prices for them. After the news is released, especially for the large, both sides of the buy order and sell order jump significantly. Whichever sequence is a winner, just let it go. And the loser will hit the Stop Loss, just let it be. The winner's gain minus the loser's losses, it is your news trading profit. For example, Non-Farm payrolls / Employment Report – The NFP the most influential press release of each month. It is announced on the first Friday of the month at 8:30 ET for the prior month. We can put a buy order and a sell order at market prices for GBP / USD at 08:29 ET. Do not forget set 30 pips Stop Loss level for them. Wait 2 minutes only news, it's a great one! Then sells jumps over 100 pips, and they buy the drops like a brick. The brick hits Stop Loss and the pain is over. Totally, your winnings could be 100-300 = 70 pips. Quick and easy, cool enough?
Trend Following:
It's so simple, just monitor developments. Buy it is the most difficult strategy because no one can tell you 100% sure what is the right TREND. Jump to look at a weekly chat on USD / CAD, if you had shorted this pair in September 2001 and held it until September 2007, you know what development means.
The most famous trend analysis tool seem Wave Principle. In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. Elliott isolated five such patterns, or "Waves" that recur in market price data.
Another trend analysis guru should be WD Gann. In 1908 Gann discovered what he called "market time factor" which made him one of the pioneers of technical analysis. To test his new strategy, he opened an account with $ 300 and one with $ 150. It proved to be wildly successful: Gann was able to make $ 25,000 profit with his $ 300 account in only three months in the meantime, he made $ 12,000 profit with his $ 150 account in only 30 days! After His performance was controlled, he became famous on Wall Street as one of the best forecasters of all time.
Back to the chat of USD / CAD, now you must tell me how to monitor progress? Will USD / CAD continue the trend, going south further to 0.6000, or another trend going north reverse back to 1.6000?
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