Strategic FX Trading Techniques

Written by Trade Team | 29 June 2009

Some of the trading techniques applied by most traders in the foreign exchange are limited to short term trades that are considered to be day / session trading without having to risk loosing in the market and just by simply taking between 10-50 pips on any given profitable trades. There is nothing really wrong in scalping the market on any single day's trading.

However, there would be times that the next corresponding position may turn out to be a loosing trade and would wipe out all short term profits that were made. This is very common amongst traders. And the next thing that would happen is that irrational trading may well take place thereafter. This is a behavior that traders need to avoid while trading in the FX maket specially, when emotions after a loss takes toll in the traders mind.

Here are just Seven (7) trading techniques that may improve any traders skills while trading the FX market. It is a good number to start with and practising the principles of Six Sigma in trading the Foreign Exchange Market can only be beneficial to the investor / trader.

On Day / Session Trades : Set a goal on the # of pips which any given position would make. This can be done by placing profit / stop loss orders ahead of time. It is quite a common practise and is set up by most of the trading platforms of the brokers. Although, there would only be a limited elbow room to move. Scaling the price range higher may also increase the risk of loss and the probability of gaining more. But it boils down to tolerance levels, profit objective and firmly setting a stop loss point.

On Tolerance Levels : This can be viewed in two ways; on a single position a trader would look at the day's trading range based on the average price ranges that the currency had established from the previous days and use that as the basis. Secondly, by setting a specific amount in mind as to how much one is willing to loose as against how much potential gains the position may have. Remember, you may want to check whether such an amount coincides with the price range. However it may be, it all depends on the risk appetite of the investor.

On Superior Positioning : Never come accross with the market head on! As the investor / trader has the upper advantage in any given time; avoid placing orders where wider spreads are being offered during rapid market actions. Normally requotes are being done automatically and with the instantaneous electronic quotes it would be harder to identify if the prices being offered are far off from the actual price range. So to postion a trade before the market moves either from an existing bias of an event or a lack of an event can be more to the investors benefit.

On Three Time Zones : Trading volumes increase and decreases in between trading sessions between Asia, Europe and the US markets. By trading in-between markets, it is essential that any short term trades made would have at least the major bias working in favor of the established position. The sentiments of two (2) sessions may well spill over on the next trading session. Either start with Europe after analyzing what the Asian market sentiments are and end whenever possible near the closing of the US market. If there are no spill over sentiments, it is logical to settle such positions at the closing of Europe. As long as no major reports are to be release in the US then it is safe to proceed and wait for the closing of the US market. Take note that corrections normally takes place before and after trading sessions. Further explanation is discussed in the ebook, MegaTrade101...the art of trading.

On Price Breakouts : By using the Price Page Indicator; a comparative price analysis can be seen when breakouts occur during a particular trading day or even the week. When this happens expect a follow-through as long as the volumes and price momentum exist and is being shown on the price movement of the particular currency. However, breakouts must be accompanied with at least two closely related currencies to sustain its direction. A combination could be both on the spot market and either on the futures financial market. Refer to the price comparison between the Open, High and Low prices on the current price summary as indicated on the price page indicator. And the Donchian Theory on trading based on breakouts is quite useful, as long as it is executed properly.

On Multiple Positions : Avoid having more than three (3) multiple positions at any given time, unless the trades made are in line with a well developed trading plan. With the recent NFA regulation on FIFO meaning, First In - First Out; it is vital that every trade has to be carefully placed based on the plan and would have enough elbow room to tolerate a floating loss until such time that a resonable amount of profit / gains will be taken first. It is very easy for the price to touch a stop loss order and vise versa as long as the prices are within the average trading range of the currency.

On Direct Conversion : This is a form of strategic method and process with a combination of Hedging strategy whereby using actual foreign currency conversions is be made as a carry trade to tkae advantage of the interest rate differentials of the other currenies involved. On top of this scenario is also to take advantage of positioning in the trade by properly allocating leverage spreads while the funds has been converted to the highest possible interest rate while trading other currencies in the market. This strategy has been applied time and again by major interbank traders and straegist to maximize the true market potential of the Foreign Exchange.