Forex Trading Strategies Can Vary from Minutes or to Months if Necessary
If the average consumer on the street were asked to describe a forex trader, the stereotypical response would most likely resemble a frenetic day-trader with a Type A behavior profile that drank far too many cups of coffee in his quest for instant profits.
The reality is that many day-trader types do gravitate toward currencies, but most burn themselves out dealing with the “24X7” demands of this high-stress trading environment. The truth is that strategies exist in the forex markets that apply to all manner of time-frames. One need not be so tightly focused, as in minute-to-minute, to find opportunities in this market.
Not everyone is cut out to be a trader, or one that engages in active management of positions in order to glean short-term gains from volatility or trends in a market. In this case, “short-term” equates to a period of less than one year. Financial advisers often prefer to encourage long-term “buy-and-hold” strategies for securities, but the prevalence of sideways trending markets and lackluster long-term performance in a variety of industrial sectors has returned attention to the art of trading. Technical analysis and its many tools are necessary components in a trader’s bag of tricks, and a disciplined approach to the market is always a prerequisite, especially in the forex market.
Strategies, however, can be chosen that fit a variety of time-frames. Each possibility is discussed below:
Short-term: Yes, day-trading is predominant in the short-term and is where a trader opens and closes all of his positions within a single trading day.
If his nerves are not completely frazzled, he can at least sleep at night or over a weekend knowing that there are no open positions that may vex him the following day. Some strategies use what are called “scalping techniques” in that the trader is content with quick market entries and exits in order to record small gains and avoid market volatility. In other cases, the trader wants volatility and tries to benefit with entry and exit points that are broader than with scalping.
Near-term: “Swing Trading” is the term applied to someone who opens a position and holds it open for a few days before timing his closing. The trader looks for trends that will hold up, especially after important economic news releases, and then attempts to ride the wave like a surfer for as long as he can. The trader will use technical indicators to guide his efforts and confirm the presence of a likely trend, and he will frequently view the potential trend over numerous time-frames to validate its strength from varied perspectives. The process is not perfect. Losses may be as frequent as gains, but the goal is to cut losses off early, and then to let winners run for as long as possible.
Long-term: Major international banks with many global branches have always engaged in what is known as the “carry trade”, a strategy that attempts to take advantage of interest rate differentials in two opposing countries. If the target country for investment is also growing faster, then currency appreciation may also add to the overall gain realized. Holding periods can last for months, even years in some cases. However, if risk aversion enters the global market, an immediate flight of capital to safe havens can wreck
this strategy if prudent risk controls are not in place. Retail forex brokers now offer “carry accounts” for this purpose for individual investors.
Trading strategies exist for all time-frames in the forex market. Choice depends on the trader’s inclination and potential forex investing strategies.