Sometimes, we will be asked what type of forex trader are we when meet up with another person who has more experience in this field. Generally there are four main strategies used by the forex trader in manipulating the currency market. There are known as intraday, scalping, swing or carry and each of them have different approaches to gain the profits from the currency market.
Intraday or in simple meaning is "within the day". Intraday price changess are particularly important to short-term traders searching to make many trades over the course of a single trading session. The term intraday is commonly used to describe securities that trade on the markets during regular business hours, such as ETFs and stocks, which must be bought from a dealer as opposed to mutual funds. This term is often used to refer to the new highs and lows of a security. For example, "a new intraday high" means a security reached a new high relative to all other prices during a trading session. In some cases, an intraday high can be equal to the closing price. Traders pay close attention to intraday price movement by using real-time charts in an attempt to benefit from the short-term price fluctuations.
Scalping is a trading strategy used by forex traders to buy a currency pair and then to hold it for a short period of time in an attempt to make a profit. A forex scalper looks to make a large number of trades and earn a small profit each time. Forex scalping generally involves large amounts of leverage so that a small change in a currency equals a respectable profit. Forex scalping system strategies can be manual or automated. A manual system involves a trader sitting at the computer screen, looking for signals and interpreting whether to buy or sell. In an automated trading system, the trader traines the software what signals to search for and how to interpret them. It is considered that automated trading now takes over of human psychology out of trading, which is important in forex scalping because the fast-paced environment can be hard for traders to follow up.
Swing is a style of trading that attempts to capture gains in a stock within one to four days. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders are not interested in the fundamental or intrinsic value of stocks, but rather in their price trends and patterns. The trader must act quickly to find situations in which a stock has the extraordinary potential to move in such a short time frame. Therefore, swing trading is mainly used by at-home and day traders. Large institutions trade in sizes too big to move in and out of stocks quickly. The individual trader is able to manipulate such short-term stock changes without having to compete with the major traders.
Carry is a method in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this method attempts to capture the difference between the rates, depending on the amount of leverage used which can often be substantial. For example, a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change.
Many professional traders use this carry trade because the gains can become very large when leverage is taken into consideration. If the trader in uses a common leverage factor of 10:1, then trader can stand to make a profit of 45%. The big risk in a carry trade is the uncertainty of exchange rates. Using the scenario above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.
However, these four strategies are not only limits to one type of forex investment. A forex trader may use either only one of these four strategies or sometimes might combining two or more strategies to manipulate the currency market. Each of the strategies may have advantages and drawbacks respectively, thus it depends on the forex trader how to implement the strategies wisely.
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