Trading pairs of currency on the Foreign Exchange (Forex) market is based on the art of making profits at a margin. Among the large financial institutions whose movements on the markets create actual currents that can be followed by others, there is also room for small, individual traders.
Successfully investing and trading are not impossible feats, nor are they even rare occurrences. Doing it for a longer period of time, however, requires mastery of the art of trading. With careful planning and disciplined execution, Wall Street becomes a place of gainful possibilities as long as you stay away from shady propositions.
However, trading is not simplistic nor mechanical. Each day and trade are fraught with tension and the ever-present need to rush, as time literally is money in this case. To be able to make sense and even profit from trading, you need to know the following 5 strategies that actually work.
1. Day Trading
Beyond strategic thinking, day trading is an approach to the entire activity of trading. Widely known, it consists of the method of buying and selling shares, securities or currency within the same day. Therefore, at the end of the day, the trader is left holding no financial liabilities. He or she only has real, monetary gains or losses.
Day trading is usually done by professional brokers to whom others prefer to entrust their money. This is because the method fully ignores overarching trends or developments which could serve as the basis of a decision.
Instead, it focuses on the short-term realities and relies much on intuition and experience. Done correctly, day trading works like a charm and can consistently provide profits. Some of the best day traders still active in the industry are Mark Lehman, Joe Kunkle, Nathan Michaud or Byron Franzen.
2. Following the Trend
Professional traders are not investors. While investors take into account current state, prospects and market conditions before committing money, traders are not looking to foster the development of a company or the strengthening of a currency. Instead, they manage to find workarounds these in order to maximize their winnings.
This distinction was made evident by some of the most famous traders in history – Paul Tudor Jones, George Soros and John Paulson. All three of them profited off of the imbalanced financial market and at the expense of other players.
The most famous traders predict market failures using Forex strategies based on time-honored models. The others are left to follow the trend that ensues after a price moves beyond the highest high or lowest low, otherwise known as a breakout.
Psychologically demanding, trend-following is also risky, as it demands from you either to buy even if the price is high, expecting it to go higher, or to sell even if the price is low, expecting it to go lower. One of the best trend-following scheme was developed by futures trader Richard Donchian and it establishes clear time parameters for doing both actions.
Even quicker than day trading, scalping does not follow the moves of the market and does not involve high volumes. With small risks and equally small profits, scalping is the practice of holding a position for a very short time and seeking to make a profit by playing on the bid and ask price. Through numerous trades, more profit gathers. This strategy is however vulnerable to sudden price changes, which can cause the ruin of small-time traders.
4. Positional trading
Meant for large financial players, positional trading – also called buy-and-hold – aims at profiting from the long game. Closer to investing than all the other trading strategies, position trading uses long term charts in order to determine the likely future conditions of the market. What, how much, for how much is either sold or bought is deduced from that.
5. Swing Trading
Based on tools and algorithms of analysis, swing trading thrives in the volatile stages of the market, when prices are uncertain and can vary from lows to highs. Usually held for a period of time between 4 hours and a more than a day, swing positions can turn up great profits once the prices stabilize and if they do so at a higher price.
To correctly anticipate the direction of the market, swing traders rely on daily charts, ignoring the often 2-hour panic periods that are so often in the trading market. At a medium time frame, swing trading provides medium-level risks and profits. It represents a good choice if you don’t want to be stuck in the scalping and day-trading junior league or assume the high risks that come with trend-following.
All of these strategies require high levels of discipline from the traders seeking to employ them. Professional traders use tools such as limit and stop/loss orders to cut their losses and move on to other trades. They are never emotional about a transaction and avoid hanging on to a position for too long, and you should not be either.