Short Term Forex Trading Strategies
Updated: March 21, 2013 at 9:11 AM
Forex trading can encompass a wide range of different trading strategies and techniques.
Some of these techniques might seem more suitable for particular traders than others, depending on the particular temperament and character of the individual.
This article will focus on strategies for trading in the forex market that tend to have a short term time horizon.
The term day trading refers to a strategy that consists of buying and selling currencies during a specified one day time period that generally corresponds to the business day in the trader's time zone.
Such day traders will generally close out all of their positions at the end of their chosen forex trading day.
The object of day trading involves the repeated buying and selling of currency pairs for what the trader hopes will be a small profit. The process of taking many small profits during the day can add up considerably for an accomplished day trader.
One of the most obvious advantages of day trading consists of the fact that day traders will generally get a good night's sleep. By not assuming overnight exposure to the forex market, the day trader can usually relax after trading, with no open positions to worry about.
They also do not have to worry about paying spreads or points away due to overnight rollover swaps incurred at most brokers if a position stays open after 5pm New York time.
Nevertheless, traders with limited or no experience may find day trading to be somewhat hectic. As a result, they might fall into many of the common trading pitfalls to avoid, such as overtrading, and they might even succumb to stress.
One of the most important elements of day trading consists of the trader's ability to rapidly enter and exit positions for a profit, preferably according to a well defined trading plan.
One of the most popular day trading techniques is called scalping. The technique of scalping involves taking advantage of the differentials in the bid offer spread in the market.
This type of trading is similar to that employed by forex professionals who make markets to their bank's clients, except for the fact that the scalper does not make a two sided market and so they can choose their initial entry direction to suit their market view.
Scalpers typically get in and out of a trade in a very short period of time, sometimes in a matter of minutes or even seconds. The scalper is typically looking to get only a few pips out of the market for each trade.
Some of the advantages that traders might enjoy when implementing the scalping technique consist of:
Less Exposure to Risk - Because scalpers work with small price differentials and only hold positions for a very short time, their exposure to risk is significantly reduced provided they are disciplined about cutting losses.
Taking Advantage of Smaller Moves - The scalper generally takes advantage of smaller differentials in the market which allows them to profit from even the least of moves in quiet markets.
Higher Volume in Each Trade - In order for a scalper to profit significantly from short term moves, a larger position must often be taken in order to make the trade worthwhile. A proficient scalper will typically be well capitalized in order to be able to take on larger positions.
Hedge Trading on News Releases
Some short term traders employ the often high volatility surrounding the release of important economic data to trade in and out of the forex market.
Since such key fundamental factors can have a strong influence on currency valuation, traders can take advantage of the release of this news to make money.
Major economic releases from the United States might such data as Non Farm Payrolls, the Gross Domestic Product or GDP, Retail Sales or similarly influential economic news releases that tend to prompt sharp swings in the market if they come out different from what the market was expecting.
One strategy used to trade news releases involves the trader positioning themselves on both sides of the market using a hedged position. This would involve them both buying a currency pair and selling the same currency pair without netting the two positions.
They would probably establish this hedged position before the significant release comes out. Once the number prints on the news wires, they would then look to leg out of the hedged position as the market swings sharply in one or both directions.
They would then close the remaining leg as the market corrects its initial and usually excessive knee jerk movement.
The disadvantage of this hedge trading strategy is that the trader must pay two spreads to enter what is essentially a flat position.
The primary advantage is that their trading account can remain neutral or hedged to sharp price swings seen immediately after the key number's release.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.