There are as many different trading styles and market approaches in FX as there are individuals in the market. But most trading styles can be grouped into three main categories that boil down to varying degrees of exposure to market risk. The two main elements of market risk are time and relative price movements. The longer you hold a position, the more risk you’re exposed to. The more of a price change you’re anticipating, the more risk you’re exposed to.
In the next few sections we detail the three main trading styles and what they really mean for individual traders. Our aim here is not to advocate for any particular trading style, because styles frequently overlap, and you can adopt different styles for different trade opportunities or different market conditions. Instead, our goal is to give you an idea of the various approaches used by forex market professionals so you can understand the basis of each style.
Short-term, high-frequency day trading
Short-term trading in currencies is unlike short-term trading in most other markets. A short-term trade in stocks or commodities usually means holding a position for a day to several days at least. But because of the liquidity and narrow bid/offer spreads in currencies, prices are constantly fluctuating in small increments. The steady and fluid price action in currencies allows for extremely short-term trading by speculators intent on capturing just a few pips) on each trade.
Short-term forex trading typically involves holding a position for only a few seconds or minutes and rarely longer than an hour. But the time element is not the defining feature of shortterm currency trading. Instead, the pip fluctuations are what’s important. Traders who follow a short-term trading style are seeking to profit by repeatedly opening and closing positions after gaining just a few pips, frequently as little as 1 or 2 pips.
In the interbank market, extremely short-term, in-and-out trading is referred to as jobbing the market; online currency traders call it scalping. (We use the terms interchangeably.) Traders who follow this style have to be among the fastest and most disciplined of traders because they’re out to capture only a few pips on each trade. In terms of speed, rapid reaction and instantaneous decision-making are essential to successfully jobbing the market.
When it comes to discipline, scalpers must be absolutely ruthless in both taking profits and losses. If you’re in it to make only a few pips on each trade, you can’t afford to lose much more than a few pips on each trade.
Jobbing the market requires an intuitive feel for the market. (Some practitioners refer to it as rhythm trading.) Scalpers don’t worry about the fundamentals too much. If you were to ask a scalper for her opinion of a particular currency pair, she would be likely to respond along the lines of “It feels bid” or “It feels offered” (meaning, she senses an underlying buying or selling bias in the market — but only at that moment). If you ask her again a few minutes later, she may respond in the opposite direction.
Successful scalpers have absolutely no allegiance to any single position. They couldn’t care less if the currency pair goes up or down. They’re strictly focused on the next few pips. Their position is either working for them, or they’re out of it faster than you can blink an eye. All they need is volatility and liquidity.
Retail traders are typically faced with bid/offer spreads of between 2 and 5 pips. Although this makes jobbing slightly more difficult, it doesn’t mean you can’t still engage in shortterm trading — it just means you’ll need to adjust the risk parameters of the style. Instead of looking to make 1 to 2 pips on each trade, you need to aim for a pip gain at least as large as the spread you’re dealing with in each currency pair. The other basic rules of taking only minimal losses and not hanging on to a position for too long still apply.
Here are some other important guidelines to keep in mind
when following a short-term trading strategy:
- Trade only the most liquid currency pairs, such as EUR/USD, USD/JPY, EUR/GBP, EUR/JPY, and EUR/CHF. The most liquid pairs have the tightest trading spreads and fewer sudden price jumps.
- Trade only during times of peak liquidity and market interest. Consistent liquidity and fluid market interest are essential to short-term trading strategies. Market liquidity is deepest during the European session when Asian and North American trading centers overlap with European time zones — about 2 a.m. to noon Eastern time (ET). Trading in other sessions can leave you with far fewer and less predictable short-term price movements to take advantage of.
- Focus your trading on only one pair at a time. If you’re aiming to capture second-by-second or minute-by-minute price movements, you’ll need to fully concentrate on one pair at a time. It’ll also improve your feel for the pair if that pair is all you’re watching.
- Preset your default trade size so you don’t have to keep specifying it on each deal.
- Look for a brokerage firm that offers click-and-deal trading so you’re not subject to execution delays or requotes.
- Adjust your risk and reward expectations to reflect the dealing spread of the currency pair you’re trading. With 2- to 5-pip spreads on most major pairs, you probably need to capture 3 to 10 pips per trade to offset losses if the market moves against you.
- Avoid trading around data releases. Carrying a shortterm position into a data release is very risky because prices can gap sharply after the release, blowing a shortterm strategy out of the water. Markets are also prone to quick price adjustments in the 15 to 30 minutes ahead of major data releases as nearby orders are triggered. This can lead to a quick shift against your position that may not be resolved before the data comes out.
Medium-term positions are typically held for periods ranging anywhere from a few minutes to a few hours, but usually not much longer than a day. Just as with short-term trading, the key distinction for medium-term trading is not the length of time the position is open, but the amount of pips you’re seeking/risking.
Where short-term trading looks to profit from the routine noise of minor price fluctuations, almost without regard for the overall direction of the market, medium-term trading seeks to get the overall direction right and profit from more significant currency rate moves.
Almost as many currency speculators fall into the mediumterm category (sometimes referred to as momentum trading and swing trading) as fall into the short-term trading category. Medium-term trading requires many of the same skills as short-term trading, especially when it comes to entering/ exiting positions, but it also demands a broader perspective, greater analytical effort, and a lot more patience.
Capturing intraday price moves for maximum effect
The essence of medium-term trading is determining where a currency pair is likely to go over the next several hours or days and constructing a trading strategy to exploit that view.
Medium-term traders typically pursue one of the following overall approaches, with plenty of room to combine strategies:
- Trading a view: Having a fundamental-based opinion on which way a currency pair is likely to move. View trades are typically based on prevailing market themes, like interest rate expectations or economic growth trends.
- View traders still need to be aware of technical levels as part of an overall trading plan.
- Trading the technicals: Basing your market outlook on chart patterns, trend lines, support and resistance levels, and momentum studies. Technical traders typically spot a trade opportunity on their charts, but they still need to be aware of fundamental events, because they’re the catalysts for many breaks of technical levels.
- Trading events and data: Basing positions on expected outcomes of events, like a central bank rate decision or a G7 meeting, or individual data reports. Event/data traders typically open positions well in advance of events and close them when the outcome is known.
- Trading with the flow: Trading based on overall market direction (trend) or information of major buying and selling (flows). To trade on flow information, look for a broker that offers market flow commentary. Flow traders tend to stay out of shortterm range-bound markets and jump in only when a market move is under way.
Big resource: Currency Trading For Dummies
