When starting out trading forex there’s much to take in. You have to work out which currency pair you wish to trade, the direction you intend to trade in and the amount of money that you’re willing to put on the line. But there’s another factor that’s equally important but is often overlooked by novice traders – and that’s timing. How often do you intend to buy and sell a currency pair for profit?
Do you intend to buy and sell every couple of seconds, every hour, daily, weekly or even over a year or longer?
Clearly, you’d want to trade forex for a living if you were to buy and sell over the very short-term such as intraday. Otherwise, you might look at longer-term trading strategies that don’t require constant monitoring of the market.
We can loosely categorise forex traders and strategies into three groups – day traders, swing traders and position traders. If you don’t know which category you fit into – take the time to find out.
The type of forex trader you are will determine how frequently you trade, the type of currency pairs you choose to trade, the charts you use, and even the strategies that you employ to make money on the markets.
Day traders buy and sell a position within the day, and hate the thought of leaving a position open overnight. These traders like to be in the driver’s seat and in control of the trade; there’s nothing more unsettling for a day trader than leaving a position open overnight at the mercy of offshore events and government announcements.
Day traders like to trade in overdrive and usually employ big leverage to make the most of small moves in currencies. Anywhere from 10 to 100 times the ordinary transaction size is fairly common for day traders. More volatile currency pairs that move the most over the day are targeted and technical analysis techniques employed. Examples of more volatile currency pairs in pips include GBP/JPY, GBP/USD, GBP/CHF, GBP/JPY, EUR/AUD, CAD/JPY and EUR/CAD. The AUD/NZD, EUR/GBP and CHF/JPY are normally seen as less volatile pairs.
Most charting packages will let you test the volatility of a currency pair by using the Average Trading Range (ATR) indicator. Place the ATF over a chart to measure the number of pips the currency pair will move on average over the time frame of the chart.
Trading over the short terms means that day traders use shorter time-frame charts such as the one, five or 15 minute.
The time frame for a swing trader is longer than a day trader – it might be a couple of hours, but more often several days to a week.
Swing traders are looking for larger and more sustained moves than day traders, using tools like stochastic oscillators to spot a change of direction in the market. Swing traders tend to stick to the more liquid currency pairs. The following currency pairs are widely regarded as the most liquid.
USD/CAD, EUR/JPY, EUR/USD, EUR/CHF, USD/CHF, EUR/GBP, GBP/USD, AUD/CAD, NZD/USD, GBP/CHF, AUD/USD, GBP/JPY, USD/JPY, CHF/JPY, EUR/CAD, AUD/JPY, EUR/AUD, AUD/NZD
A trade won’t always go in a profitable direction for the swing trader – particularly at the outset of the trade. Regularly a trade will swing in the wrong direction and a trader will be nursing losses until the trade moves back in their favour.
Successful swing traders are dogged, confident types who can wear the pain of loss until a trade settles in profitable territory (or until they are forced to take a loss).
Just like day traders, swing traders also assess the volatility of particular currency pairs before placing their bet. But here the swing trader will shun volatile currency pairs for the more recognised and liquid currency pairs referred to as the ‘majors’ – such as the EUR/USD, GBP/USD, USD/JPY and AUD/USD.
The Position Trader
The position trader isn’t concerned about short-term market movements like the day trader or swing trader, but about long-term trends spanning weeks or months. A position trader may even take a position out for a year or more if they strongly believe that the currency will move in a particular direction.
Clearly, position traders rely on fundamentals over technical analysis (charting), and will have a thorough understanding of economics including how currencies are impacted by government action and interest rate settings.
Trading over the long term means that the position trader is less concerned about short-term volatility, provided that the overall trend for the currency pair is heading in the right direction.
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