Short Term Forex Trading
The Foreign Exchange Marketplace, also known as Forex, is the largest trading market in the world. Every single day over $4 trillion in currency is bought and sold. One of the reasons Forex is so popular is because it's the ideal marketplace for short-term trading opportunities. Here's why:
- The ability to trade on leverage makes it easy to make a lot of even on even the smallest wins.
- Forex does not charge any fees or commission, you only have to beat the spread. This makes short-term trades much more cost-effective.
- Currency pairs are traded on Forex 24 hours a day during the business week, giving savvy investors more opportunities to make profitable trades.
Currency markets can be volatile in the short-term, however, so it's important to know exactly what you're getting into before you start trying to make a quick buck.
Understanding Short Term Forex Trading
Forex gives investors the opportunity to speculate on currencies pairs from around the world. A wide variety of currency pairs are traded on Forex, but the majority of trades focus on only a handful of pairs. These pairs tend to include the world's major currencies, such as the U.S. dollar, the British pound, the Japanese Yen, and the Euro. Less commonly traded currencies aren't ideal for trading in the short-term since they're less frequently traded and extremely volatile.
The most important thing you'll need to pay attention to during short-term trading is the spread. Since Forex charges no fees, the spread is the commission that your trading firm takes. It's the difference between the price they charge you to buy a currency and the price at which they'll purchase it. In order to make a profit on any short-term trade, you need to overcome the spread.
Usually, a spread is several pips, which is the smallest increment that a currency pair is tracked on. A typical pip on major currency pairs goes to four decimal places, but many others will go to two, as well. Your wins and losses will be tracked by how many pips a trade earns. When you're trading on leverage, these wins will be magnified, so every pip is vital to your bottom line.
Short Term Trading Strategies
The most common short-term Forex trading strategy is known as scalping. Scalping is based entirely off of charts that are fifteen minutes and less, usually one and five-minute charts. Any chart that is longer than fifteen minutes is considered too long-term for a scalper.
Scalping is all about analyzing a currency pair carefully for momentary profitable opportunities. If you notice that a pair is trading for much more or much less than it was five minutes ago, this is likely only a temporary peak or valley. Unless some serious market volatility is occurring, a price will tend to trend steadily in the short-term. Thus, by identifying these outlier trades, you'll be able to buy and sell immediately, taking advantage of the eventual regression to the mean.
Often times, Forex scalpers will use trading bots to help assist them. These bots will be able to notice temporary trends quicker than a human could, and they can make the trades immediately. You have to use bots carefully, however, since they do not have the ability to analyze outside factors. If news or conditions have changed to drive a market quickly in one direction, the bot will interpret these sudden changes incorrectly. It's best to use a bot judiciously, mixing in your own expertise as you see fit.
Finally, you need to make sure you manage your risk carefully. One of the biggest downfalls of short-term day traders is that they neglect risk management. You can do this in a number of ways:
- Limit the amount of leverage you use unless you have specific reasons to do so.
- Take the time to set sensible loss limits, and do not neglect them when the time comes.
- Using careful analysis and not letting psychological factors influence trading decisions.
- Not using bots during especially volatile conditions.
- Starting with smaller trades until you get your feet wet.
When made carefully, short-term trades are extremely profitable. Now that you have the basics down, create an account with us to start making money!