source: BabyPips
Forex trading is intricate and comes with many opportunities. Exploiting these opportunities doesn’t just require you to study the definition of what Forex is. You also need in-depth knowledge about how to trade Forex through the varying methods available to you.
Each type of Forex trading is profitable for a specific kind of trader. So to give you a chance to compare options and make the right choice today, we provide you with the all-important information about trading the Forex market. So let’s get right into it.
Types of Forex Trading
Generally, there are four types of Forex trading. They include:
- Scalping
- Day trading
- Swing trading
- Position trading
These trading methods or styles are mainly defined by the duration of time you hold your trades. Additionally, however, they also differ in how much analysis and intensity you have to put into your trades to maximize profits.
Scalping
Scalping is a Forex trading style where you hold your trades for mere seconds or minutes. Although it is the method with the briefest time frame, scalping requires the most analysis and intensity compared to others. To succeed, you need to watch the charts every time.
As a scalper, your goal is to profit from every pip. So you enter into as many trades as possible to accrue small profits. These small profits build up over the whole day or entire series of trades you enter to add up to something substantial.
Through trading volatile currency pairs, scalping has the highest potential to make you the most profit. This is especially when you trade on Forex derivative contracts that allow you to short the market and make a profit from a fall in price. Scalpers face one problem, however.
Forex trading platforms charge a spread on all trades. Due to the small yield scalping brings, these spread charges may eat up your gains on a profitable trade. Thankfully, spread charges get thinner when there is heightened trading volume. This is why scalpers get into the market during the most active times of the day and trade on the most liquid pairs that have high trading volumes. An example of these pairs is the EUR/USD.
Day Trading
Day trading is simply a Forex trading style where you enter and leave your trade within a day. You hold a position for minutes or hours and exit it when the daily trading session closes, regardless of whether you make a gain or loss.
The style is for individuals who can’t sustain the intensity of scalping but want to profit from short-term trades. Alongside having a proper understanding of technical analysis, traders study charts over one, five, or 15-minute timeframes.
Fundamental analysis is also an important part of day trading. Unlike when scalping, traders have enough time to study the market sentiments and developments when shaping their decisions on approaching a trade.
Day trading delivers more profit when you deal with highly-volatile currency pairs, just like scalping. Unfortunately, it also gives you little profits that amount to substantial gains after several profitable trading sessions.
Swing Trading
Swing trading takes a higher time frame into account. It is Forex trading, where you hold your trades for hours, days, or weeks just to gain the most number of pips from a trend-based trade.
While day trading and scalping may require you to constantly monitor changes in the Forex market, swing trading is different. You only need to analyze how the market is predicted to move over the next few days or weeks and place your trade accordingly. You only check the charts after a day or a few days to know where the trade is at.
To succeed with swing trading, you also engage in top-level technical and fundamental analysis to recognize the primary short-term trend before entering your trade. All this means swing trading is an excellent option for individuals with other obligations other than trading.
Swing traders additionally make use of the counter-trend and breakout trading strategies to identify the best entry points.
Position Trading
As you may have guessed, position trading comes with the lengthiest time frame. It is a long-term trading style where you maintain positions for weeks, months, or years to get the highest number of pips possible.
Position trading focuses more on the fundamental analysis of the market rather than the technical analysis of the charts. This is because it is fundamental developments like a change in fiscal and monetary policies, interest rates, or GDP that affect the long-term value of currencies.
Even though technical analysis could be helpful, position traders study these fundamentals closely to identify the best entry and exit points. They also pay attention to the news rather than charts to identify any possible change in trend.
Position trading is best for individuals that wish to place high-valued investments and don’t mind paying opportunity costs. This is because successful traders only take a single trade direction into account, don’t worry about or try to capitalize on pullbacks, and are rather satisfied with their profits at the very end of the trend line.
Key Takeaways
There are four methods of trading Forex and the amount of time or dedication you wish to put into the market determines which is best for you.
- Scalping is short-term and great if you have all the time in the world to constantly watch the charts.
- Day trading is also short-term. It is for you if you don’t like the intensity of scalping and needs more time to analyze trades before diving into them.
- Swing trading is mid-term and great if you want to capitalize on longer trends without having to watch the charts constantly.
- Position trading is long-term and the best option if you want to invest a lot of money with the lowest amount of risk.
Conclusion
Attaining success in the Forex market requires dealing with the right method of Forex trading. You do this by identifying where you stand amongst Forex traders and making the right choice accordingly.