Forex or foreign exchange is the marketplace where currencies can be exchanged with each other. Forex trading is at its heart the process of buying and selling currencies and is one of the markets that have the heaviest trades.
Forex trading involves trading in currency pairs. There are three types of currency pairs, including minor, major, and exotic pairs. Major currency pairs are the most often traded currencies, while minor pairs don’t include the US dollar. Exotic pairs are those where one currency is a major one and the other is a developing economy currency.
There are different types of forex trading and traders based on the trading type. Here are some of the types of forex trading:
This type of forex trading is long-term and you can hold or take positions for months. Position trading relies on fundamental analysis of the trade. Position traders base their decisions on forex charts analysis and forex market analysis. They use a combination of fundamental and technical analysis.
Position trading involves the use of strategies such as support and resistance trading and trend forex trading. For the latter, technical tools such as moving average are used. Support and resistance forex trading involves spotting support and resistance zones on forex analysis charts. The zones are where the price trend has the likelihood of reversing or stopping.
Breakout trading strategy is also a part of position trading, and it can help position forex traders to understand if there are indications of a new trend. Breakouts occur when price tends to move beyond or outside support/resistance levels.
Another aspect of position trading is pullback trading which is a small reversal or drop in a current trend. The pullback forex trader will then leverage the pause or drop in the current trend.
While position trading is a long-term style, swing trading is a medium-term style used by forex traders. This style involves price swings and holding your trade for many weeks at a time. Then, this kind of trader identifies a trend that is likely to be forming and holds the trade. This is a style ideal if you don’t have the time to take up forex charts analysis throughout the day but you still have the time to focus on it for a few hours every day.
When it comes to swing trading, there are some widely used strategies including reversal, retracement, breakout, and breakdown trading.
Reversal trading is based on price momentum change. Retracement trading is all about spotting a temporary reversal of price in the context of a trend that is larger.
Breakout trading involves taking a position at the beginning of an uptrend and then waiting for the price to breakout. Once the price has broken an important resistance level, you make your entry into a position.
Breakdown trading is the opposite; the position is taken at the beginning of a downtrend and you, as a forex trader, are looking for a breakdown of the price, and enter the position once the price breaks down a support level.
A forex day trader opens and closes trade in the course of the day. This forex trading style taps into the price movements that happen within a day or a trading session. This type of trading is ideal if you have enough time on your hands for forex market analysis at the opening of the day’s trade and then monitoring through the day.
Forex day trading also involves trend trading and counter-trend trading through the day. With trend trading, you begin with a chart that covers long time frames and identify a trend. Then, you move into the chart that covers a shorter time frame. You look to trade in the direction of this trend as it helps with timing your entry.
Countertrend day trading involves looking for a big trend covering a longer time frame and then looking opposite for trades. Here, it’s all about identifying a trend’s ending and getting in as the reversal happens.
Scalping or scalp trading is also a popular type of forex trading where you scalp or get hold of trades for a mere few minutes. This can happen many times during the day, but you can make small trades each time. As a scalper, you can place dozens of trades in a day. This type of trading is fast and action-filled. All the positions get closed as the trading day ends. Scalping is ideal for those who can spend a lot of time on their trading as it requires you to stay focused on the forex charts analysis. It needs you to think on your feet.
What kind of a forex trader are you?
Each type of forex trading suits a personality type and it helps to understand if you are the right fit for that type of trading. You can be a scalper, a day trader, a swing trader, or a position trader. A scalper needs to stay alert and grab tiny amounts of percentage in points (pips) several times a day, while a day trader could pick one side at the day’s beginning and end the day with their trade either winning or losing, and no trades are held overnight. Swing traders hold on to their trades for days or weeks. They focus on the charts or take up forex market analysis for a few hours a day to make their trading decisions. Position traders base their decisions on fundamental and a certain amount of technical analysis and hold on to their trades for months or even years.
Forex trading needs you to stay disciplined and learn the elements of forex analysis charts and technical tools, apart from fundamental analysis. It also helps to chart out your own trading plan and stay focused on that. It is easy to start a trading and demat account online and gain access to real-time data about the markets and comprehensive reports that help you gain a deeper understanding of the forex markets.