Despite what you may read elsewhere the forex markets don’t represent some kind of easy get rich quick scheme for investors in too much of a hurry to work with stocks and shares. Although currency positions can often shift quickly, actually succeeding in making a profit via forex – whether buying and selling currencies or spread-betting on how they are going to move – involves a degree of research and hard work. The fact that it’s possible to trade more or less around the clock on whatever mobile device you have to hand has helped to foster the impression that forex trading is something that can be done in a casual manner, but the truth is that – even if you’re trading while travelling from one meeting to another – you still have to tread carefully. Knowing how and when to buy and sell currencies, or to bet on a shift in one currency against another, relies on much more than simply a gut instinct about how the markets are going to act. It also calls for a range of attributes such as the willingness to study the wider conditions affecting any given currency, the patience to plan before actually putting any money on the line and the willpower and calmness to follow your plans through even when things might not be going as well as you expected.
Although the forex markets change from day to day – something which is part of their appeal to the retail trader – there are still general principles and techniques which can be applied time and time again. The first of these is to decide whether to opt for a long or short term approach:
Short term techniques are more prevalent among forex traders for the simple reason that the forex markets are often relatively volatile in nature. Adopting a technique like scalping or day trading has a dual advantage – if it’s going to produce a return it will produce that return quickly, and the fact that positions only stay open for a short period of time minimises the chances of losses building to a damaging degree. The other implications of short term trading are that positions have to be monitored very closely, operational costs can be higher due to the number of trades being made and, while profits may be generated often, they are likely to be smaller.
Spread betting on forex markets is particularly suited to longer term trading techniques, since spread bets can be carried over night without accruing the kind of costs associated with carrying a forex position overnight. Long term strategies such as swing trading concentrate on building profits via the larger shifts of currencies over a longer period of time. Spotting shifts like these before they happen is generally much trickier than spotting the smaller shifts associated with short term strategies, although one advantage of a longer term strategy is that positions don’t have to be monitored as closely. The downside of this, of course, is that if things shift badly against the positions you’ve chosen, the amount lost could mount considerably over a prolonged period of time, particularly when the impact of leverage is taken into account.
Strategies for a trending market
A market is said to be ‘trending’ when the shifts in position of the currencies concerned are more violent – i.e. when the highs are higher and the lows lower than would normally be expected. Following and taking advantage of a trending market involves making use of technical analysis to gather the depth and detail of information needed to spot when a market is going to move, and how. It is a particularly useful strategy for someone spread betting on currencies as the trend can be tracked and used to generate profit by going either long or short on the spread bets placed.
Strategies for a consolidating market
Dealing or spread betting within a consolidating market means working with the constraints of a market that doesn’t feature the kind of sharp highs and lows of a trending market. The kind of strategy used in this kind of market is often referred to as ‘scalping’. It involves making multiple trades to take advantage of very small but very frequent shifts in the value of currencies. As this description suggests, it is a strategy which combines the concentration needed to constantly monitor markets which are open round the clock with the temperamental ability to act quickly when opportunity arises, and the patience to take small but (hopefully) frequent profits in return for the strategy adopted.
Reversals strategy involves placing spread bets or taking positions based on the conviction that the market has moved as far as it is going to in a particular direction – either up or down – and is about to correct itself by moving back. The key to the strategy lies in choosing the right moment to take a position, and this relies on longer term analysis which reveals the upper and lower limits over a specific period. When the value of a currency approaches these limits, a trader adopting a reversals strategy will be watching closely, prepared to act the instant the trend goes into reverse.
As mentioned above, scalping refers to a short term trading strategy which involves opening and closing trades as soon as even the smallest gains become apparent. It’s the ideal strategy for someone who wants to minimise the chances of big losses and enjoys the interaction with the markets as they shift and fluctuate. It maintains a steady stream of income without risking too much capital, while the main downside is the risk of seeing positions which were closed quickly developing in a way which would have produced much higher profits.
Spread betting on movements
Spotting a movement just before – or just as – it happens, opening positions in reaction and then riding the wave of a movement throughout the day can be a highly profitable means of taking advantage of more major fluctuations in currency prices of the type often triggered by external forces. For example, any announcement by the UK government which is seen to increase the chances of a no deal brexit is likely to send the pound plummeting, and a keen observer of the political scene could predict when such an announcement is coming and be ready and waiting to take up profit making positions. This is a technique particularly suited to retail investors able to move quickly using relatively smaller funds.
Most of the strategies discussed so far revolve around deciding when to take a certain position, but pyramiding involves increasing the exposure to a particular position as the market moves in the right direction. This could be done by increasing leverage as a currency shifts up or down, depending on the position taken, and while the risk of losses is higher, the risk of greater profits comes from taking advantage of a position which has already shown itself to be correct.
While no single strategy is always effective, and there’s no such thing as a guaranteed strategy in any circumstances, learning as much as possible about a range of strategies will arm you with the tools needed to operate as a retail investor, whether you’re buying and selling currencies or spread betting on the movement of a pair of currencies. Even the most basic understanding of short and long term trading, as well as techniques like scalping and pyramiding, will arm you with the confidence needed when the market shifts and there are profits to be made.