DAY 5

Basic Forex Trading Strategies

The most basic forms of forex trades are long and short trades. In a long trade, the
trader is betting that the currency price will increase and that they can profit from it. A
short trade consists of a bet that the currency pair’s price will decrease. Traders can
also use trading strategies based on technical analysis, such as breakout and moving
average, to fine-tune their approach to trading.

Depending on the duration and numbers for trading, trading strategies can be
categorized into four further types:

 A scalp trade consists of cumulative positions held for seconds or minutes at

most, and the profit amounts are restricted in terms of the number of pips.
 Day trades are short-term trades in which positions are held and liquidated on
the same day. The duration of a day trade can be hours or minutes.
 In a swing trade, the trader holds the position for a period longer than a day, like
days or weeks.
 In a position trade, the trader holds the currency for a long period, lasting as
long as months or even years.

Charts Used in Forex Trading

Three types of charts are used in forex trading.They are:

Line Charts

Line charts are used to identify big-picture trends for a currency. They are the most
basic and common type of chart used by forex traders. They display the closing trading
price for a currency for the periods specified by the user. The trend lines identified in a
line chart can be used to devise trading strategies. For example, you can use the
information in a trend line to identify breakouts or a change in trend for rising or
declining prices.

While useful, a line chart is generally used as a starting point for further trading
analysis.

Bar Charts

Like other instances in which they are used, bar charts provide more price information
than line charts. Each bar chart represents one day of trading and contains the opening
price, highest price, lowest price, and closing price (OHLC) for a trade. A dash on the
left represents the day’s opening price, and a similar one on the right represents the
closing price. Colors are sometimes used to indicate price movement, with green or
white used for periods of rising prices and red or black for a period during which prices
declined.

Bar charts for currency trading help traders identify whether it is a buyer’s or seller’s
market.

Candlesticks Charts

Japanese rice traders first used candlestick charts in the 18th century. They are
visually more appealing and easier to read than the chart types described above. The
upper portion of a candle is used for the opening price and highest price point of a
currency, while the lower portion indicates the closing price and lowest price point. A
down candle represents a period of declining prices and is shaded red or black, while
an up candle is a period of increasing prices and is shaded green or white.

The formations and shapes in candlestick charts are used to identify market direction
and movement. Some of the more common formations for candlestick charts
are hanging man and shooting star.

Pros and Cons of Trading Forex

Pros
 Largest in terms of daily trading volume in the world
 Traded 24 hours a day, five and a half days a week
 Starting capital can rapidly multiply
 Generally follows the same rules as regular trading
 More decentralized than traditional stock or bond markets

Cons
 Leverage can make forex trades very volatile
 Leverage in the range of 50:1 is common
 Requires an understanding of economic fundamentals and indicators
 Less regulation than other markets
 No income generating instruments

Pros Explained

 Forex markets are the largest in terms of daily trading volume globally and
therefore offer the most liquidity.2 This makes it easy to enter and exit
a position in any major currency within a fraction of a second for a small spread
in most market conditions.
 The forex market is traded 24 hours a day, five and a half days a week—starting
each day in Australia and ending in New York. The broad time horizon and
coverage offer traders opportunities to make profits or cover losses. The major
forex market centers are Frankfurt, Hong Kong, London, New York, Paris,
Singapore, Sydney, Tokyo, and Zurich.
  The available leverage in forex trading means that a trader's starting capital can
rapidly multiply.
 Forex trading generally follows the same rules as regular trading and requires
much less initial capital; therefore, it is easier to start trading forex than stocks.
 The forex market is more decentralized than traditional stock or bond markets.
There is no centralized exchange that dominates currency trade operations, and
the potential for manipulation—through insider information about a company or
stock—is lower.

Cons Explained

 Leveraged trading can make forex trades much more volatile than trading
without leverage.
 Banks, brokers, and dealers in the forex markets allow a high amount of
leverage, meaning traders can control large positions with relatively little money.
 Leverage in the range of 50:1 is common in forex, though even greater amounts
of leverage are available from certain brokers. Nevertheless, leverage must be
used cautiously because many inexperienced traders have suffered significant
losses using more leverage than was necessary or prudent.
 Trading currencies productively  requires an understanding of economic
fundamentals and indicators. A currency trader needs to have a big-picture
understanding of the economies of the various countries and their
interconnectedness to grasp the fundamentals that drive currency values.
 The decentralized nature of forex markets means it is less regulated than other
financial markets. The extent and nature of regulation in forex markets depend
on the trading jurisdiction.
 Forex markets lack instruments that provide regular income, such as regular
dividend payments, which might make them attractive to investors not interested
in exponential returns.

Are Forex Markets Volatile?

Forex markets are among the most liquid markets in the world. So, they can be less
volatile than other markets, such as real estate. The volatility of a particular currency is
a function of multiple factors, such as the politics and economics of its country.
Therefore, events like economic instability in the form of a payment default or
imbalance in trading relationships with another currency can result in significant
volatility.

Are Forex Markets Regulated?

Forex trade regulation depends on the jurisdiction. Countries like the United States
have sophisticated infrastructure and markets for forex trades. Forex trades are tightly
regulated in the U.S. by the National Futures Association (NFA) and the Commodity
Futures Trading Commission (CFTC). However, due to the heavy use of leverage in
forex trades, developing countries like India and China have restrictions on the firms
and capital to be used in forex trading. Europe is the largest market for forex trades.
The Financial Conduct Authority (FCA) monitors and regulates forex trades in the
United Kingdom.

Which Currencies Can I Trade in?

Currencies with high liquidity have a ready market and exhibit smooth and predictable
price action in response to external events. The U.S. dollar is the most traded currency
in the world. It is paired up in six of the market's seven most liquid currency pairs.
Currencies with low liquidity, however, cannot be traded in large lot sizes without
significant market movement being associated with the price.

The Bottom Line

For traders—especially those with limited funds—day trading or swing trading in small

amounts is easier in the forex market than in other markets. For those with longer-term
horizons and more funds, long-term fundamentals-based trading or a carry trade can
be profitable. A focus on understanding the macroeconomic fundamentals that drive
currency values, as well as experience with technical analysis, may help new forex
traders become more profitable.