You can trade forex using algorithms or some other advanced concepts. Forex might seem easy when you start, but it’s not as straightforward as you think. The Forex market is multifaceted and includes basic and advanced strategies.
Forex is the most traded item globally and its used by brokers, financial institutions like banks, and individual investors. Traders will use basic and advanced strategies to risk and hedge for profit and commerce.It may seem that your only role as a trader is to identify the direction of a currency pair and get a profit.
In forex, you need a mixture of fundamental and technical skills as well as an understanding of the factors that move the currencies traded. Some of these factors are advanced trading concepts. Let’s look at some of the advanced forex trading concepts in detail.
The Advanced Forex Trading Concepts Include:
Forex Options
A forex option is a contract to buy a specific currency pair at a particular future date and a preset price. For instance, you take a long position on the EURUSD currency pair at 1.2 and you suspect it will drop to 1.1 in overnight exchanging. Not wanting to risk more loss, you decide to implement a stop-loss at 1.15, thereby getting a potential loss of 500 pips.
A 500-pip loss is very damning, and you decide to use a forex option to lessen the loss. You buy an option during the overnight hours at a strike price of 1.15. If the EURUSD currency pair goes up but doesn’t reach 1.15, you will lose the premium you paid for the option.
If the EURUSD pair falls and reaches the strike price, you will profit from the option depending on how much you paid as a premium. Thus, the option profit will help you make up for some of the loss from your currency trade.
Scalping
Scalping is when you make a short-term trade for a couple of pips using high leverage. Scalping is best done alongside helpful technical conditions and a news release. The trade can last anywhere between a few seconds to a couple of hours.
Many novice traders begin with scalping, but it doesn’t take long to determine how much you stand to lose if you don’t know what you’re doing. Generally, scalping is a risky skill that doesn’t play well considering the risk.
If you’re going to execute scalping trades, it’s best to make them in combination with your general trading position, not as a primary trading method. Advanced forex trading is all about viewing all your options when you execute a trade.
Position Trading
Position trading is based on your general contact with a currency pair. Your position is your average rate for a currency pair.
For instance, you could make a short trade on the EURUSD pair at 1.2. If the pair eventually trends down and then trends up and you take another short at 1.22, your average position will be 1.21. Once the EURUSD pair drops below 1.21, you will get a profit.
Hedging Forex
Hedging is a strategy to diminish risk by taking both positions in a trade at the same time. If your broker allows it, you can implement a long and short position on the same pair. Traders at times use two unlike pairs to make a single hedge, but that can become very difficult.
For instance, you decide to take a short position on the US dollar and the Japanese Yen (USDJPY) because you see it at the top or a recent price range. After setting up your short, you start to think that the USDJPY currency pair is looking a bit strong and that it might break upward and make your short relatively cheap.
To balance the act, you start looking at the other USD pairs. You find that the Swiss franc to dollar pair (CHFUSD) moves opposite to the USDJPY. To close your hedge, you decide to go short on CHFUSD. The dollar will break resistance and move strongly against the JPY.
Final Thought
To sum it all up, you can be successful in forex by using advanced trading concepts. The initial challenge is how to implement these concepts accurately and then minimize risk. Once you’ve handled both these challenges using advanced trading concepts will be pretty straightforward.