Different approaches to Forex trading range from simple methods to the more time intensive approaches

Forex Trading

Forex trading has become the latest trend among investors. Tired of the lackluster returns of many stocks, long-standing equity traders are opening accounts with forex brokers and trying their hands at something new and more exciting. With forex, profits can be made much quicker than with most other investment instruments; losses are just as quick and are often more extreme.

Traders Differ

When entering the forex markets, most new traders tend to choose certain pairs–EUR/USD, GBP/USD and USD/JPY. Obviously, these are considered the major pairs. They are the most popular simply because they are currencies that are much more in circulation than many of the others. These pairs also are technically more straightforward and behave in a more anticipated manner than minor currencies.

More astute forex traders, however, choose currency pairs based on the size of the spreads offered by the forex broker. They also focus in on the broker that provides the most up-to-date reports on these pairs as well as the most instructive material provided on the brokerage site.

Highly experienced traders will take into account the time of day they are placing the trade as this is indeed an important factor depending on where they live in the world. Forex markets are scattered across the globe and trading is conducted on almost a 24/7 basis.

Diversity is Beneficial

After trading for a while, even a profitable trader will find trading on these major pairs to be somewhat tedious and will look for instruments that reflect a more diverse market, despite the extra pip spread that it entails. For example, a trader can decide to trade a pair or cross including JPY (Japanese Yuan), another one with USD, another with EUR etc. Diversifying a portfolio is always a sound approach, and with forex trading, the name of the game is movement. If a pair is not moving, a trader cannot make any money. So if on a typical day, the EUR/USD only moves 0.6% and EUR/JPY moves 1.2%, it is more worthwhile to trade the EUR/JPY pair despite the extra cost it involves.

Another approach used by some forex traders is to look at all possible pairs and see which are set up the best. This can be an exhausting endeavor and a trader can lose track of what is really going on in the market. In addition, this approach may not accurately reflect the real movement of every pair and can turn out to be more confusing than beneficial. Movement is the important factor in forex trading and by trading too many currency pairs a trader can become too exposed to the market and lose sight of the slight movements which can make the difference between a profit and loss.

Historical Prices

There is an additional technique to choosing currencies for those who wish to put in a lot more research and effort. Studying the historical performances of a pair—i.e. the moving averages based on 5, 10 and 20 days–can indicate past fluctuations and possible future volatility. After viewing their historical values a trader should consider choosing no more than the top four pairs to follow.

Going over the historical data will show that once a pair breaks into the top 4, it usually stays there for a while, and its volatility increases further. These are the best pairs to trade at that particular moment in time. And although one would think that it is best to trade when volatility is relatively low, the truth is that the biggest swings happen by trading the more volatile pairs and these prove to be the most profitable moves.

Story by invezz.com.

Gary Beal