Forex Trading Styles
The foreign currency exchange market, or forex, is one of the riskiest ways to trade in the financial industry. Traders speculate on changes in currency exchange rates, and they do so with high amounts of leverage. A typical forex account offers the ability to buy 50 times more currency than your cash balance is worth. This leverage makes it possible to profit handsomely, but also maximizes risks. Different trading styles handle this risk in different ways.
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Lot Size
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Many of the differences in forex trading styles relate to risk management. Well-capitalized traders may be comfortable handling larger amounts of risk, while those with little cash should do everything they can to minimize their risks. A key difference in style is the lot size of the trades. This is a function of the brokerage account you set up. A standard forex account trades 100,000 units in a single lot, which is the smallest-sized trade you can place. This is quite risky for small accounts since it exposes you to significant percentage gains or losses. A better style for the risk-conscious is to utilize a micro forex account. These trade in lots of 1,000, which is just 1 percent the exposure of a standard account. Novice traders can better enjoy the learning curve without placing too much money on the line.
Time Frames
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Another key distinction among forex trading styles is the time frame of the trading. The time frame refers to the size of the history of price action that you consider in your trading decisions. Those who study the ultra-short-term time frames are usually day traders who speculate on micro fluctuations in exchange rates over the course of just minutes or even seconds. Longer-term traders consider the past several days and aim for larger swings in price changes. The longest time frame applies to long-term investors who place a trade and hold onto it for weeks or even years. The time frame affects the maintenance required in your trading style. A day trader must usually trade hands-on throughout the day, and for many this is their full-time work. An investor's style, however, is relatively hands-off, with little day-to-day interaction with her positions.
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Trend Following
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Among trading styles, there are two key variations. Some traders aim to join a trend and ride it to its end. Others look for the end of a trend and will trade in the opposite direction, hoping to participate in a major price reversal. Trend-following styles are similar. One method places emphasis on trend lines that you draw directly on a price chart. If you can draw a straight line that connects at least three low points on a chart, and this line slopes up, then you have a valid trend. With this style of forex trading, you wait for prices to drop close to the trend line before buying. Should the trend continue, prices will again bounce off the line and lead to quick profits.
Trend Reversals
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Some traders prefer a style of finding tops and bottoms in price fluctuation to trade in the opposite direction. The techniques for trading in this manner are innumerable and risky. One style focuses on the patterns created by candlestick charts. A candle is a price bar with the open and close emphasized by a wide rectangle within the bar. When a candle forms that is opposite the color of the prior candle and stretches above and below the prior candle, this is an "engulfment." Some forex traders look for these moments and then trade in the direction of this new candle. When correct, these engulfment candles do signal major trend reversals, providing these traders with excellent entry prices.
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