Short-Term Forex Trading Strategy
Forex trading can be treacherous, as currency markets suddenly change prices and trend in a new direction. A wise trader elects a short-term forex trading strategy to limit downside risk. Day trading is the term used to describe short-term strategies in which a position is open for no more than 24 hours. To day-trade successfully, a trader must have an accurate forecast of exchange rates and proper money-management techniques to quickly take profits and cut losses.
Other People Are Reading
-
Short-Term Forecasts
-
There are two elements to a short-term forecast of exchange rates: current trend and likelihood of a reversal. To identify the current trend, traders use graphical techniques such as candlestick charts to verify whether a currency pair (currencies always trade in pairs) is in a trend, and if so, whether the trend is up or down. Once the trend is identified, a momentum indicator like the relative strength index (RSI) is used to forecast whether the trend is likely to continue or reverse. By using these and other tools of technical analysis, you are more likely to achieve success.
Tight Stop Orders
-
A basic short-term trading strategy is to purchase a position in a currency pair and then place tight stops around the position. A stop is an order to close a position. A tight stop is a stop in which the position is closed at a price not too far from the opening price, thus limiting risk. A stop-loss order is the maximum amount you are willing to lose on a position. When the market hits the stop-loss price, your position is sold. Similarly, a take-profit order is an order to close your position at the minimum acceptable profit. By employing tight stops, you are exposing yourself to risk for only a short period of time.
-
Day Parts
-
The currency market trades 24 hours a day, Monday through Friday. Experienced traders learn to recognize trading patterns within a 24-hour cycle. For instance, trading volume picks up around 8 a.m. EST when New York traders become active. A short-term trader may choose to trade only at high-volume times of day for a couple of reasons. First, the bid-ask spreads are lowest during high-volume periods, saving you trading costs. Second, high volume translates into a more liquid, less volatile market. Less volatility means fewer surprises, a positive for tight-stop traders who want to avoid being stopped out for a loss.
Binary Options
-
An alternative to trading currency pairs is to trade binary options on currency pairs. These options are short-term bets (as little as four hours in duration) on the direction and amount of price movement currency pairs will experience. If you are correct, you collect $100 per contract. The option price is calculated at the time of purchase and is a function of current market conditions and time until option expiration.
-
References
Resources
- Photo Credit young business man 6 image by Paul Moore from Fotolia.com
