Top 5 Forex Trading Strategies

As a new foreign exchange trader, you understand that the Forex, the place where you can trade currencies, can change as quickly as the penny stocks on the pink sheets. If you're still new to Forex trading, you may have been lured because it's the market that never sleeps. Unlike stock markets, you can trade 24 hours a day. Like the stock market, you can make a profit whether you go long or short, but finding a buyer in the Forex is easier because so much is traded daily. Recent data shows that the average daily value was just over $5 trillion. That number is lower than in recent years, but it's still much higher than the U.S. stock market, which trades around $169 billion daily.
Trading on the foreign exchange is easier than ever because of online Forex trading. Once you have an account open, you just need capital. Although you can open an account for as little as $100, you won't be able to trade much. If you plan to be an active day trader, it could work, but you risk losing all your capital quickly. Generally, Forex traders risk no more than 1 to 2 percent of their capital on a trade, which limits you to $1 to $2.

When you trade on the foreign exchange, you're essentially betting on one currency's value against another. So, you always trade in pairs. For example, say the Forex quote reads EUR/USD 1.4223 – this means that the Euro is worth 1.4223 U.S. dollars. You believe the value of the Euro will increase, so you purchase Euros with U.S. dollars, and wait for it to increase. Now you watch to see how many pips it rises or falls. A pip is 0.0001. If it goes up to 1.4233, then the currency value has increased by 10 pips.

When you're ready to start trading the Forex, you just need to load an account with money to play with and then choose a strategy. There are several from which to choose, and not every strategy works for everyone. Some are ideal for the casual trader, while others can be used to generate daily income. The majority of the strategies for trading on the Forex market, though, are speculative, whether you're following historical charts (technical) or trading on the news (fundamental).

Carry Trading
Long-term investors take advantage of stable markets with carry trades. A stable financial market means lower interest rates. To perform a carry trade, you'd borrow money at a low interest rate in a market with low interest rates, and then use that money to invest in a currency with a high interest rate. As long as economies hold, you reap profits by holding the position. Market volatility or shocks could result in a major loss, though.

Swing Trading
If you're looking to make money through Forex trading in your spare time, this might be the right strategy for you. Swing trading is good for medium- to long-term trades – a couple of days to a couple of weeks. You can profit from swing trading if you're patient. The idea is to choose any of the major currency pairs, such as EUR/USD, during a volatile time, set your stop-loss and take-profit orders, and then wait out the ebbs and flows of the financial tide. The reason this strategy is best for those who only trade in their spare time is that it somewhat eliminates the emotional reaction you could have when you see the Forex quotes every hour. You must fight your instinct to sell too soon because of fear, or hold too long because of greed.

Day Trading
Day trading is a common practice in many markets by investors who hold stocks, assets or, in the Forex market, currencies, for only hours at a time, and typically less than a day – hence the name. It's a fast-paced, and often stressful, strategy that isn't for the weak of heart. There is no one trick to successful day trading, but generally investors choose to follow a trend until there's a tick one direction or the other. You should get in as soon as a currency hits your set target, and out at your take-profit point. It's tempting to hold longer and hope for a breakout, but you could be setting yourself up for a big loss. This is also known as scalping in the Forex market. If you plan to use a Forex scalping system, you need to have a large amount of capital because you're going to make several trades every day.

Positional Trading
As with most trading strategies, positional trading on the Forex requires you to buy low and sell high. In this strategy, though, you want to hold your position longer than usual – weeks, months or even years. It's a good option for those who don't want to follow the markets day in and day out. You can use technical analysis and study charts with historical data going back months to spot long trends. It's essentially trend trading. You follow a trend and jump on board. A common method is to choose a currency pair that is already moving up the charts and buy those, or those that are already falling and short-sell those (this is where the common phrase "the trend is your friend" comes from). It's a slow-burning method, but it can result in big returns.

Arbitrage Trading
This is considered a risk-free trading strategy, if you can find the opportunity and strike quickly enough. The simple explanation of it is this: You buy and sell the same currencies simultaneously and make a profit off the difference. It seems more complex than that. Here's an example that can help explain it.

Let's say you have $5,000 to trade, and EUR/USD is at 0.8500; the EUR/GBP is sitting at 1.2500; and GBP/USD is 0.9500. Convert your dollars and you'll have 4,250 euros. Now convert those euros to pounds and you'll have 5,312.50. Then move your money from pounds back to U.S. currency and you'll be at $5,046.875. You made a profit of $46.875. The percentage of profit isn't all that high (0.93%), but over time, more money and cooperative foreign markets, you could make quite a bit of money.

Whichever trading strategy you choose, every investor needs to follow their own strategy. Don't switch up strategies in the middle of a trade, don't hold your position longer than you initially intended, and fight the urge to sell too early.