In this article we look at the different types of currency trading strategies and systems the forex trader can choose from before commencing their FX trading journey.
The Best Currency Trading System
There are many many different currency trading systems out there for sale, some even claim to be the best currency trading strategy ever! Unfortunately, these systems sold online rarely (if ever) live up to this bold claim. And the reality is, if these forex strategies were really any good, it is unlikely they would be for sale. The owner of the system would be using it to make money currency trading, instead of spending his time and possibly money marketing the strategy.
Carry Trade Strategy
The carry trade is an extremely popular trade in the FX Market. It is made possible by the fact that different countries have a different benchmark interest rate. At the time of writing this article, Japan’s benchmark interest rate was just 0.5%, whilst the benchmark rate for New Zealand was 8.25%. Interest rates fluctuate based on economic conditions. It is USUALLY the case when one benchmark rate is on an upward trend and another country’s benchmark rate is on a downward trend, the currency on the upward trend will appreciate against the currency that is on the downward trend. This is not a guarantee, but it is a common occurrence. Each time you buy a currency pair that has a positive interest rate differential, you will receive a credit each day for the interest rate differential. However, the reverse is true if the pair you are trading has a negative interest rate differential. For example, a long NZD/JPY position would receive a credit each day (also known as the swap) whilst a short NZD/JPY position would have to pay the negative interest daily.
Trend Trading System
As the name suggests, trend trading systems attempt to capture trends. Some forex pairs trend very well indeed in the long term. On that really springs to mind is EUR/USD. It has been in a long upward trend for many years, with few significant retracement, making many record highs along the way. In the forex market the trend really is your friend. Never open a long term position against the long term trend.
Forex Scalping Strategy
A Forex scalping strategy aims to profit from very small price movements. Scalping positions are usually opened and closed within a short time frame. It’s important to choose a broker with as low a spread as possible for when scalping to minimize the number of spreads the trader has to pay.
Forex News Strategy
There are many news trading systems out there. Many people attempt to trade the initial news spike after a data release. Price can move one direction very quickly seconds after a new release, leaving a good opportunity to trade. The move is often bigger if there is a surprise in the numbers. I remember a shock interest rate hike by the bank of england in January 2007. The pair GBP/USD rose around 150 in less than a minute!
If you want to trade news spikes it is important to have a very fast news feed that can get the numbers to you as quickly as possible, before the market moves. An example of a budget news feed is Tradethenews. Bloomberg and Reuters both offer professional news feed, they are not cheap though.
It also important to have a broker that has very fast execution around the news releases. Many retail forex brokers do not like news traders, so it is important to find a broker that best suits your needs. Due to the high volatility around the news releases execution on a live account is often very different to that of a demo account.
Automatic Forex System Trading
The idea of an automatic trading system that makes you lots of money and requires minimal maintenance is appealing to many for obvious reasons. The most common form of automated forex trading is the use of the platform Metatrader4. This allows the trader to create a piece of software that will trade according to a specified set of rules. Unfortunately, most of these systems do not stand the test of time. Some may do well in the short term, but very few indeed earn money long term. There are many of these automated currency trading systems for sale, often with a big price tag. Generally it is best to stay clear of these. The same line of thinking as mentioned above applies, if the strategy was making money, why would they be selling it?
In conclusion, the best online currency trading system is the one that suits you best. Many new traders have a day job and are unable to spend several hours a day trading, so some strategies may be unsuitable. For example, if your FX trading strategy was to profit from carry trades in the long term. You could just open a position and leave it alone. However, if you wanted to scalp the forex market, this would probably require a much bigger time commitment. Of course, you can use many different strategies to try and spread your risk out as well.