Currency Trading & Forex Trading Strategies

Currency Trading Forex Trading Strategies 1. What is Currency Trading? Currency Trading is the act of buying and selling (trading) different currencies of the world. The Foreign Exchange (or Forex) is the market that allows you to trade currencies in volume. 2. How it works? It's the largest financial market in the world, trading around $4 trillion each day. Forex market is open 24 hours a day. It provides a great opportunity for traders to trade at any time of the day or night. However, when it seems to be not so important at the beginning, the right time to trade is one of the most crucial points in becoming a successful Forex trader. 24 x 5 3. What Currencies are traded? Forex always involves two currencies: one currency being bought, in exchange for another currency. Together, the two currencies are called a currency pair. Rank Currency Names Symbol 1 Euro / US Dollar EUR/USD US Dollar / Japanese Yen USD/JPY 3 British Pound / US Dollar GBP/USD 4 US Dollar / Swiss Franc USD/CHF Euro / British Pound EUR/GBP Euro / Japanese Yen EUR/JPY 7 Euro / Swiss Franc EUR/CHF Australian Dollar/US Dollar AUD/USD 9 US Dollar / Canadian Dollar USD/CAD 10 New Zealand Dollar / US Dollar NZD/USD 4. Pairs and Pips USD All currency trading is done in pairs. Unlike the stock market, where you can buy or sell a single stock, you have to buy one currency and sell another currency in the forex market. Next, nearly all currencies are priced out to the fourth decimal point. A pip or percentage in point, is the smallest increment of trade. One pip typically equals 1/100 of 1%. CAD 5. Bid / Ask Spread It is common for any currency pair to be quoted with both a bid and an ask price. The former, which is always a lower price than the ask, is the price at which a broker is ready and willing to buy, which is the price at which the trader should sell. The ask price, on the other hand, is the price at which the broker is ready and willing to sell, meaning the trader should jump at that price and buy. EUR/USD 1.36 7 40 1.36 8 42 SELL BUY Bid Price 6. Leverage (Margin Trading) In other financial markets, it would generally be required to have the full deposit of the amount that of which is traded. However, in the foreign exchange market, all that of which is required would be a margin deposit, with the remainder being granted by the broker. Usually, the amount of leverage provided is either 50:1, 100:1 or 200:1, 10% Margin 100% Value but some brokers offer leverage up to 500:1 or even 1000:1. Forex Trading Strategies Type 1 Day Trading Day traders buy and sell stocks throughout the day in the hope that the price of the stocks will fluctuate in value during the day, allowing them to earn quick profits. A day trader will hold a stock anywhere from a few seconds to a few hours, but will always square off all of those stocks before the close of each day. The day trader does not own any positions at the close of any day therefore immune to overnight risks. The objective of day trading is to quickly get in and out of any particular stock for a profit on an intra-day basis. 2 Swing Traders The principal difference between day trading and swing trading is that swing traders will normally have a slightly longer time horizon than day traders for holding a position in a stock. As is the case with day traders, swing traders also attempt to predict the short term fluctuation in a stock's price. However, swing traders are willing to hold stocks for more than one day, if necessary, to give the stock price some time to move or to capture additional momentum in the stock's price. Swing traders will generally hold on to their stock positions anywhere from a few hours to several days. 3 Position Trading Position trading is similar to swing trading, but with a longer time horizon. Position traders hold stocks for a time period anywhere from one day to several weeks or months. These traders seek to identify stocks where the technical trends suggest a possible large movement in price is likely to occur, but which may not be fully played out for several weeks or months. 4 Breakout trading to A type of trader who uses technical analysis to find potential trading opportunities, identifying situations where the price of an asset is likely to experience a substantial movement over a short period of time. Breakout traders generally look for key levels of support and resistance and will place transactions when the asset's price passes through these levels. Long positions are taken when the price of an asset breaks through a level of resistance, and short positions are taken when the price breaks below a level of support. 5 Hedge trading Hedge trading is essentially reducing or leveling your risk by making trades that potentially cancel each other out to some degree. Some newer forex regulations have removed the ability for direct hedging with US Forex traders. It used to be possible to go long and short on the same pair in the same account. This is still possible with accounts not based in the US, but in the US it's no longer allowed. 6 Economic News trading A trader or investor who makes trading or investing decisions based on news announcements. Economic reports and other news can have a short-lived affect on particular markets. News traders try to profit by predicting how a market will respond to particular news. The old saying "buy the rumor, sell the news" means that rumors have one effect on a particular trading instrument's price movement, and news can have an opposite effect. NEWS 7 Elliott Wave Theory 3 The Elliot Wave Theory represents a development of the well-known Dow theory. It applies to any freely traded assets, liabilities, or goods (shares, obligations, oil, gold, etc.). The Wave Theory was proposed by accountant and business expert Ralph Nelson Elliott in his study titled "The Wave Principle" published in 1938. 4 8 Divergence trading When the price of an asset and an indicator, index or other related asset move in opposite directions. In technical analysis, traders make transaction decisions by identifying situations of divergence, where the price of a stock and a set of relevant indicators, such as the money flow index (MFI), are moving in opposite directions. LL HL 9 Price Pattern trading In technical analysis, the distinctive formation created by the movement of security prices on a chart. It is identified by a line connecting common price points (closing prices, highs, lows) over a period of time. Chartists try to identify patterns to try to anticipate the future price direction. Also known as "trading pattern". Ascending Triangle Prepared By: Earnforex.com