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Forex Trading: Which Style is Yours?

By: , dated January 25th, 2013

There are definitely a few trading strategies to consider in the Forex (foreign currency exchange) game, with some of the more common including scalping, swing, position, discretionary, and automated trading. Investors new to the FX market may be tempted to choose one of these strategies right out of the gate and then gauge its success later – perhaps after it is already too late! But rather than commit to any of these strategies in the beginning, it is better to first understand what kind of investor you are and which style suits you best. Do you like to stalk your investments like prey and first learn every potential move that they could make before making a commitment? Or, are you a forager that scrounges high and low for a chance to make a decent profit and will jump on board any time conditions seem to meet a basic set of criterion?

Stalkers are methodical and will not invest until they understand every aspect of how the different political, economic, and psychological factors all affect currency rates. Stalkers are really known as trend traders because they believe they can predict currency momentum trends by understanding all factors that affect exchange rates between different economies. However, trend FX investors are also patient and they know that significant alterations to currency exchange rates typically take months to unfold.

Foragers, on the other hand, are typically looking for the highest profits in the least amount of time. Scalping is a favorite currency trading strategy for foragers as it involves predicting future exchange rates a few hours or days into the future. There are hourly charts in the FX market. Smaller investors can generally arrange transactions and react quicker to breaking economic news. Sudden spikes in interest rates and oil prices, natural disasters, wars, political unrest, gold prices – any number of conditions can trigger subtle shifts in exchange rates. By mobilizing capital faster, the forager can buy in, make a quick but reasonable profit, and get out before the rest of the market has had time to adjust. Foragers want to get in and make their profits before the markets can retrace and are known as counter-trend investors. They bet against the general trend in the market by quickly reacting to factors that can affect short-term currency exchange rate spikes.

After deciding between a patient, long-term approach and a short-term strategy, an investor needs to decide how best to predict currency rate movements. Fundamental and technical analysis are the two basic options. Fundamental analysis involves deciding how current events will affect future currency rate movements. Political events, release of government economic indicators like the GDP rate, unemployment figures, trade deficit, prime interest rate movements; even major speeches by people like the Fed Chairman can all affect currency rate movements according to those who believe in fundamental analysis.

Technical analysis, however, focuses upon the recent history of the currency exchange rate movements to predict future changes. Investors who believe in technical analysis think that fundamental indicators such as economic or political news are inconclusive and unreliable predictors of future price movements. However, in theory and according to technicians, it is possible through technical analysis to examine how similar political or economic news events affected past prices – and then use this analysis to predict future price movements.

FX traders should not typically exclusively base decisions on one type of analysis or another. However, trend investors (long term) and counter-trend advocates (short term) do have very different approaches. Trend investors tend to do better when they focus on fundamental factors and their potential affec t on currency exchange rates. Because these investors are thinking in terms of months, factors like GDP growth, interest rates, trade deficit/credit figures, and commodity prices all have an impact.

Technical indicators, however, tend to be better for short term investment opportunities. Over time, the exchange rate will build up a support level. This is typically the price level that has proven difficult for a currency to trade below – the currency has traded at a lower level in its history, but only rarely. Therefore, technical analysis will help an investor determine the best bid price to come in at. There is also a resistance level which is the point that the currency has difficulty trading above. The resistance and support levels can be used to help determine stop and target points for FX traders.

Recent price fluctuations can be converted into a moving average. Bollinger bands can be created in technical analysis and they are typically in the form of two standard deviations from the moving average. There is an upper and a lower Bollinger band and each runs parallel with the moving average. They do this because standard deviation is a measure of volatility, so the bands will adjust to movements in the moving average – but not equally. When conditions are more volatile, the bands will move farther away from the moving average but get closer as volatility decreases. The Bollinger bands are very helpful for short-term traders as they help establish stop and target points with greater accuracy and improve profits.

While technical analysis tend to be better for short term investments and fundamentals better indicators for long term trends in currency exchange rate fluctuations, neither can predict price movements with 100% certainty.

This article was brought to you by the InvestorGuide Staff Writers and Editors.

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