It’s no secret that Forex trading is one of the most lucrative and potentially risky financial markets available. Though there are certainly several different strategies and methods you can use to increase your chances of success, it may be helpful for new traders to know about some simple strategies they can employ as they get started.
The professional brokers at Saxo Bank has mastered the art of using trading strategies. Check-in with them to see how it’s done.
Hedging
By using currency pairs based on economic indicators that tend to move in an opposite direction, you can reduce your risk while maintaining returns or even increasing them. For example, if the dollar strengthens against the Euro, you can generally expect it to weaken against the British Pound, so trading GBP/USD and EUR/USD gives you an opportunity for gains on both trades.
Arbitrage
The Foreign Exchange Market allows for potential risk-free transactions through a practice known as arbitrage. Suppose two currencies are simultaneously traded at different prices in two different markets. In that case, there is the possibility of selling one currency at a higher price and buying another at a lower price in order to make easy money. For example, if EUR/GBP = 1.2230 / GBP 1.2275, traders could buy one Euro with 0.0150 more Pounds than they sell them for, making an easy 0.015 per trade (EUR 100 =GBP 1.30).
Trend Following
Trend following is a statistical strategy that involves attempting to ride the momentum of currency prices. By simply buying currencies on an uptrend and selling them when they are down, forex traders can attempt to maximize gains on each trade by riding both upward and downward trends for as long as possible. While this isn’t always the best way to make money, it does have some benefits over other methods, namely that it reduces transaction fees associated with closing trades more quickly. Many traders use this trading method without even realizing it because many automated trading platforms are designed this way.
Scaling In / Scaling Out
Scaling in refers to entering positions gradually at different price points instead of all at once. Scaling out refers to closing positions gradually instead of all at once. This is a valuable strategy that can help traders reduce their risk by allowing them to enter and exit the market on lower time frames while remaining in the trade for longer periods. For example, if you scale into a position, you would open your first half on a 30-minute trend and close it on another 30-minute trend two or more candles later than when you originally entered the market. Then, you could open up another position with the next half of your capital during the next day’s trading session and so forth until you had filled all your intended positions entirely.
Hedging With Options
Using an option such as a futures contract (this is a contract bought and sold on an exchange that obligates the owner to buy or sell a security at a fixed price and date) can help take the risk out of your trades. As futures contracts are traded over-the-counter (that is, they aren’t listed on an exchange; you make them up yourself), it’s possible to write your own custom contract for any set of circumstances.
For example, you could write an option for EUR/USD with a strike price of 1.2500 expiring in 5 days if the market was currently trading below that level. If this did occur, you would then owe one Euro per share (ex: 100 Euros = $120). However, if the market was above 1.2500 by expiration, the other party (the counterparty) would owe you 100 Euros per share (ex: 100 Euros = $120). This ensures that your risk is limited to the premium paid for the option itself, regardless of how much or little the market moves.
The takeaway:
While trading and investing in forex presents a lot of risks and challenges, there are strategies that traders can employ to minimize those risks and increase their chances of success. By using these simple strategies, it’s possible not only to make more money from each transaction but also to reduce potential losses over time.
