At first sight, Forex trading can seem like a very simple way to earn money from your money. However, there is more to the world of foreign exchange currency trading than simply picking what path a currency pair may go and collecting the profit. There are four very important techniques you must be able to master to be even more successful.
Hedging is a technique that decreases risk by acquiring both sides of a trade simultaneously. A simple method of hedging is to open a long and short position on the same pair. An advanced Forex trader can hedge by using two separate pairs. If you are new to foreign exchange currency trading, you should stick to the simpler method of hedging first, until you fully understand how and when to use the advanced option.
This technique is established on your complete presentation to a currency pair, because your position is the average price for the currency pair. For example, let’s say you make a short trade on EUR/USD at 1.40. If the pair is eventually trending lower, but then spikes back up and you take an additional short trade at 1.42, your average position becomes 1.41. When EUR/USD drops back below 1.41, you will be back in overall profit.
A forex option is an arrangement to buy a currency pair at a certain price at a predetermined time. Pretend that you are long EUR/USD at 1.40 and you predict that it will fall to 1.38 while you are asleep. In order to prevent a greater loss, you can place a stop on it at 1.3750, which sets up a potential loss of 250 pips. To lessen the impact of this potential loss, the technique of the Forex option comes to the rescue. You then purchase an option for the night hours with a strike price of 1.3750. If the EUR/USD never touches 1.3750, you lose the premium you paid for your currency option. On the other hand, if it does reach 1.3750, instead of suffering a loss, you would receive a profit depending on how much of a premium you paid.
Scalping is a high risk technique in which you make a very short term trade for a few pips usually applying high leverage. Usually, scalping works best when done in unison with a news release and complementary technical conditions. The time range of this trade is between a few seconds to a couple of hours. If you are a beginner, it is not recommended to tamper with scalping until you truly know what you are doing.
If you truly understand when to implement these techniques and how they work, hedging, position trading, Forex options, and scalping can truly make a big impact on the profits you accumulate and the minimization of losses.