What Are Some of the Most Common Trading Techniques?

Carry Trading

Carry trading is a trading strategy whereby a trader will borrow money in a currency that has a low interest rate and use it to invest in a currency with a high interest rate, earning the interest rate differential profit. Carry trading is a time based technique, and typically sees profits over a longer scope of time. For example, let’s say a trader borrows Japanese Yen, which has a relatively low interest rate, and uses it to buy Canadian Dollars, which has a higher interest rate. The trader would hold on to the Canadian dollar, earning the higher interest rate, but pay the lower interest rate on the borrowed Yen.

As a general rule, carry trading requires significant capital and also carries a significant amount of risk.

Technical Analysis

A more traditional technique, technical analysis is a strategy that involves studying charts and other market data to identify patterns and trends. This data is extrapolated to predict future price movements. Technical analysis is a time consuming method, though generally holds less risk than many other strategies, as trades are based on data and a good understanding of trends.

Algo Bots

A more recent phenomenon, the use of algorithmic trading bots, or algo bots is becoming increasingly widespread. Algorithms powered by artificial intelligence can be programmed with immense amounts of market data and can even be connected to the internet, enabling the algorithm to learn from current events in real time. These bots can trade 24 hours a day and have the potential to earn greater returns than human traders. While it is important not to rely solely on algo bots for all of your investing, algo bots can be a useful tool in an arsenal of investing tools used to generate profits.

What Are Some of the Most Common Risk Management Techniques?

Investing, whether on forex or any other exchange, will always carry the potential to incur losses of some magnitude. While that potential can never be fully eliminated, it can certainly be reduced, or even minimized. Two of the most common strategies forex traders use to help reduce their level of risk are diversification and stop-loss orders. Diversification is self explanatory, and involves trading across multiple currencies, as opposed to relying on only one currency pair. Stop-loss orders are a strategy for limiting risk, and involve automatically selling a currency pair before it reaches a certain low price, allowing traders to get out of a trade at a predetermined price or loss amount.

Algorithmic Trading

When trading in the Forex market, algorithmic bots known as forex robots or, more generally, algo bots, can be used instead of humans, and this method of trading comes with both pros and cons. A forex robot is a program that uses algorithms to analyze the forex market and make trades on behalf of the user. Forex robots use technical indicators and historical data to determine when to buy and sell currencies.

There are many different forex robots available, and they can be used by traders of all experience levels. Some forex robots are more sophisticated than others and can be customized to fit the specific needs of the user. However, it’s important to note that forex robots are not a guaranteed way to make money in the forex market. Like any other trading method, forex robots carry certain risks and there is no guarantee of success. It’s always a good idea to do your own research and test a forex robot before using it to trade with real money.

Is Algorithmic Trading Better Than Human Trading?

Forex trading can be done manually, by analyzing market conditions and placing trades manually, or it can be done using automated trading software, known as a forex robot. Forex robots are essentially algo bots specific to forex, and execute trades on a trader’s behalf. Algo bots are a type of artificial intelligence whose technology is being actively developed and improved on every day.

Algo bots are highly advanced tools used to potentially improve a trader’s returns, though they should be seen as exactly that — a tool. Artificial intelligence is not yet advanced enough to be relied on entirely, and human oversight and even intervention is oftentimes necessary to ensure an overall successful trading outcome. Nevertheless, there are several advantages to using automated trading software when trading on forex.

Algorithmic bots can be faster and more accurate than manual trading. Because bots are programmed to follow a specific set of rules, it is less likely to make mistakes or get emotional, which can affect a trader’s decision-making. These programs are also vastly intelligent and can be trained according to a large set of successful trading strategies.

Automated trading software can also be used to backtest trading strategies, allowing traders to see how their strategy would have performed in the past.

When trading on the forex market it’s important not only to familiarize yourself with trading and risk management techniques, but with common terminology as well. Here is a short list of terms you will hear often in forex trading:

CFDs: CFD, or Contracts for Difference, are a type of financial derivative that allow traders to speculate on the price movement of an asset without actually owning the asset. In forex trading, CFDs can be used to trade currency pairs.

Spot Forex: Spot trades, also known as spot transactions, are a type of forex trade whereby the physical currency is delivered on the spot, or immediately. Forex spot trades are the most common form of spot trading. A spot trade is when the trader buys a currency at the current market price and the trade is settled on the spot.

Spread: The spread is the difference between the bid and ask price of a currency pair. In forex trading, traders buy at the ask price and sell at the bid price. The spread is the broker’s fee for facilitating the trade.

Pip: A pip is the smallest unit of price movement in a currency pair. Usually, a pip is equal to the fourth decimal place of a currency pair, for example 0.0001 for the EUR/USD pair.

Bull Market: A bull market is a market where prices are generally rising.

Bear Market: A bear market is a market where prices are generally declining.

Leverage: This is the use of borrowed funds to increase the potential return on an investment. In forex trading, leverage allows traders to trade larger positions with a smaller amount of capital. While leverage has its upsides, it can also increase the risk of losses.

Beta: Beta is a measure of a stock’s volatility in relation to the overall market. A beta of 1 indicates that a stock’s price will move with the market, while a beta of less than 1 means it is less volatile than the market, and a beta of greater than 1 indicates higher volatility. Beta can be used to measure the volatility of a currency pair.

Blue Chip Stocks: Blue chip stocks are the stocks of well-established companies that hold a long track record of stability and performance. This type of stock is considered to be a safe investment because of its stability, and is oftentimes used as a benchmark for the overall market.

For the beginner, trading can seem overwhelming and the potential pitfalls can be a significant deterrent for many people. This is especially true vis-à-vis the forex market, which is the world’s largest, trading at a ballpark of $5 trillion worth of currency every day. In any case, here is a simplified checklist to help beginners dip their toes in forex trading.