Published On: Wed, Nov 7th, 2012

The Different Ways You Can Trade Forex

In the Forex (Foreign Exchange), there are multiple ways to trade the market. If you simply search the web, you will find articles that refer to definitions of spot trades, forwards, futures, swaps, and options. These terms refer to three ways to trade the market: immediate (spot), later (forwards, futures, swaps), and maybe later (options). These are concepts of what a trade is, not strategies of how to trade.

The three main categories for Forex strategies are: fundamental, technical and price-action. These three categories are broad and encompass many subcategories, but there is a basic overall definition to each. Forex fundamentals consist of: economy, interest rates, production, earnings, and financial management. The technical analysis for Forex would consist of forecasting future prices based on the study of past prices, volumes, and a long list of other indicators. Price action, typically involving open market prices and mass volume trades, is much less strategy than formula but it still counts.Most Forex traders use a mix of strategies from each category. Considering just how general the sections are, there is also some crossover within the most popular ways to trade Forex. Here are a few specific examples.

Support and Resistance Strategy

This strategy is a very popular technical analysis style of Forex trade. Using historical trading graphs, two lines are drawn along the top and bottom of the graph to create a channel. These two lines essentially create a reference point. If the graph crosses over the line in either direction it is considered a “breakout” or “breakthrough.” The positions of these lines would be calculated based on two or more highs and two or more lows on a candlestick graph.

The Carry Trade Strategy

The main idea of this trade strategy is to buy two currencies. One of the currencies will have a high interest rate and one will have a low interest rate. This type of trade requires a basic understanding of currency pairing and how fluctuations between two currency values effect each other. This type of trade is a forward, and because it includes interest rates, it is further classified as a futures strategy.

The Martingale Strategy

This was initially an eighteenth century betting tactic where the better would double the bet after each loss until eventually a win would regain all losses and grant some additional profit. While this does have some situations it could theoretically apply to, the strategy can eventually use up all of a trader’s resources before the final win. This is neither a fundamental or technical strategy and is completely based off of price and probability. This has similar resource requirements to another strategy called scalping.

The above strategies are listed in the best order for a beginner Forex trader to attempt them. The Martingale strategy, however, might never become a good idea. Along with this selection of strategies, here is a short list of a few other important ideas to consider.

Trend Line Breakout
Parabolic SAR
Stochastic Oscillation
Fibonacci Numbers
Buy and Hold

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.