Before we get into determining strategies for forex trading, let’s make sure we understand the core of Forex Trading. The forex market is a dynamic market place where foreign currencies are traded actively. This is normally done using brokers as the via media. Huge amounts of money is made or lost through these forex trades.
The retails traders are often unprepared of the road that lies ahead of them in the forex market and this article will help you avert heavy losses that may have occurred by diving straight in the trading of forex helping you in saving your hard earned money and assisting you in becoming a money-making forex trader.
These trades are done by:
- Businesses because their dealings are global and involve trading in goods and services that need to be paid for, or for consideration received in foreign currency, and by
- Speculative traders who thrive in the glorious uncertainties of the forex market and operate with the sole objective of gaining from these forex trading activities
The strategy for trading would accordingly depend on whether you are a businessman or a speculator. It is necessary to have a strategy simply because not having one is a sure shot strategy for failure. And that is not something acceptable to either the business man or the Speculator – one does not want to lose money on the forex market and the other wants to make money on the forex market. Again, whatever may be the objective, one thing is for certain – only the well informed actor achieves his objective.
Corporate or a Business House
Business Houses are exposed to the risks of the forex market because of their exposure to foreign currency dealing arising out of the contracts executed. Normally these houses shy away from taking risks in the forex market, reason being forex trading is merely incidental to their core business and not their core business. They do not like forex market risks to affect their carefully planned strategies for success in their business.
In such cases forex strategies revolve around how to ensure that their businesses are protected from the adversities of the forex market. They tend to be risk-averse in the sense that they do want the forex market risks to add to their bucket of risks that are associated with their business. What then, determines forex trading strategies for such business houses?
- They like to hedge their exposure to forex market risks: they would like to remove entirely (if possible) or at least significantly reduce their risks related to forex market exposure.
- Some business houses tend to protect themselves when a risk is foreseen and the more forward thinking ones tend to make it a way of life to manage exposure to risks. They make policies to prevent individuals from taking calls based on their assessments. They tend to continuously evaluate risks involved and hedge accordingly using tools offered in the forex market and make sure that their businesses are rendered sustainable.
- While entering into forward contracts would seem to be the favorite option for these business houses (with the objective of preventing losses to the business), some of them would prefer the currency options mode which also allows you to benefit from favorable market situations. The latter of course needs smart treasury managers who understand nuances of forex trades well and take the right steps at the right time to make money using the market situation.
- Business houses like to work on logical or rational decision making processes – the why determines what and how of the actions they take. They focus on their core business and only focus on forex trading to the limited objective of staving off risks to their core business.
A Speculator is an investor. An opportunist. Combine these two in the field of Forex market and you will see an Operator who wants to make money using the volatility or the swings in the forex market to make money out of money.
Even the Speculator does not like to lose money, even as he would admit that the forex market trade exposes him to the risks of losing money. Such players in the forex market tend to win with their professional approach to the “game” and their personal attitude.
What would they do?
- They study the forex trades well and they use their knowledge to take a view on the market
- They tend to use statistical tools / technical analysis of the forex market like charts and trends to corroborate the views that they take
- Pick up sentiments ruling in the market
- They tend to pinpoint advanced support and resistance levels to support the kind of positions they take in the market
- They tend to fix clear price objectives for profitable trades and try to take an objective view on market’s topping or bottoming.
- They tend to fix clearly the stop loss and make profit and exit targets and adhere to them
- They avoid being reckless. Being disciplined is half the battle won.
- They have sound logic for taking positions in the market
- They avoid being greedy – they set clear stop loss and take profit and exit targets and adhere to them.
- They limit their risks by putting a cap on their losses.
- They apply logic to their decision making process and this minimizes the risk of losing money
- They trust their intuition – beyond all logic, there is always the intuition factor that a seasoned trader has.