In the financial markets, trading refers to the process of buying and selling financial assets to generate a profit over a certain period. The Forex market involves 2 main types of trades based on the time which the trade is held namely, intraday and interday trading. Day trading is the main type of trading in intraday trading while swing trading and position trading are the two main types of interday trading. Read on to learn more about these types of trading.
Intraday Trading – Day Trading
Day trading refers to the kind of trading whereby traders open and close forex trades within the same business day in the hope of realizing desired profits. Day traders always close trades within the same day thus minimizing risks associated with overnight movements in the markets. Day traders exit all positions by the end of the day regardless of the profits or losses they have generated.
Day trading involves 4 trading strategies
Scalping: Scalping aims to catch small movements in the Forex market. Scalping is based on the belief that small movements are easier to catch than the larger ones. Scalpers take advantage of the small movements by placing large orders to multiply profits. Losses are amplified in a similar way.
Fading: Fading refers to trading against the prevailing market trend. It is a highly risky strategy. The logic behind the strategy is that no market can rise/fall forever so the trader here takes advantage of reversals in the market after the market has moved in a particular direction for a given period. Though risky, the strategy can pay off quite well when it works.
Daily Pivot Trading: This trading strategy makes use of a pivot table, which is a statistical tool. The pivot table identifies the pivot point, resistance, and support for the current market movement. A trader subsequently identifies the market movement then makes appropriate trades.
Momentum Trading: This trading strategy involves riding the current market trend. This strategy is the direct opposite of the fading strategy and involves simply riding the market. i.e. selling when the market is trending downwards and buying when the market is trending upwards. Traders here use a variety of tools to determine trend direction such as MACD, RSI, etc.
Interday Trading – Swing Trading
Swing trading is yet another type of short-term trading just as day trading. The key difference between swing and day trading is the time frame. Swing trading unlike day trading involves holding trades for more than just one day in the hope of taking advantage of price swings.
Swing trading can involve holding trades from a couple of hours to several days. The profit target in swing trading is usually much higher than that of day trading.
Swing Trading involves 3 trading strategies
Breakout Trading: Breakout trading involves taking advantage of breakouts on charts. Breakout trading involves examining support and resistance areas on the charts and watching out for any potential breakouts. Traders then wait for the market to break out and close above/below the resistance/support area to avoid getting into a ‘fake out’ (false break).
Retracement Trading: Retracement trading makes liberal use of a technical indicator known as Fibonacci Retracement tool. It is a mathematical calculation that shows potential retracement areas based on the Fibonacci ratios of 100%, 61.8%, 50%, 38.2%, 23.6%, and 0%. Fibonacci retracements are horizontal levels that indicate potential support and resistance zones of the current trend. The key premise behind retracement trading is that once price rises to a particular level and it starts to correct, it is probably going to retest previous levels.
Reversal Trading: Reversal trading involves trading when the market moves within a particular range. For instance, if a particular currency pair starts to feel buying pressure after testing lows, it is expected to test the higher levels again. A trader here would take a long position while the currency pair reverses from the low levels with the low being the stop-loss area and the target being the top of the range.
Positional trading involves taking advantage of price movements over a comparatively longer period than day or swing traders. Positional traders usually hold positions from periods as little as a couple of days to weeks and sometimes even months or years. One of the keys to success in positional trading is identifying currency pairs that promise large movements. Positional traders usually depend on a mix of fundamental and technical analysis to determine entry and exit points for their chosen currency pair. Positional traders generally expect higher profits than day or swing traders but are also exposed to different types of risks associated with longer holding periods.
Using Binary Option Trading To Hedge Forex Positions
The Forex market is full of uncertainties and it is always good to hedge your positions. Binary options offer an excellent way to protect traders from various unfavorable outcomes. You can use binary options to hedge against failed breakouts or ensuring that you don’t suffer heavy losses because of the market failing to reach your desired profit targets.
Forex traders are now embracing the idea of using binary options to hedge their Forex positions to help minimize risk. Binary options just like Forex offer a variety of options when it comes to expiry times. You can have binary options that have a one second expiry all the way to those with an expiry period of a couple of weeks sometimes even a month.
The trading types and associated strategies discussed in this article are not exhaustive. However, the strategies discussed in this article are the most popular ones and offer opportunities for both beginners and professional traders. Retracement trading and pivot trading and suited to beginners since they are relatively simple. Scalping, fading, breakout trading, and reversal trading require more skill and are thus best suited to experienced traders. On the other hand, positional trading involves a blend of technical and fundamental analysis which takes traders a long time to learn and perfect. Finally, binary options trading can be an interesting complement to regular Forex trading and it is time to embrace this new advancement.