The global forex market is a magnet for traders looking to make a profit on their investments. And there’s no sign that its popularity is waning. Every three years, the Bank for International Settlements (BIS) reports on trading activity in the forex market.
In its 2022 study, BIS found an average of $7.5 trillion was traded in OTC forex markets each day in April 2022.
The figure is a leap up from the $6.6 trillion average daily trading volume recorded three years ago. And it shows that traders are continuing to flock to the market in search of returns on the money they’re investing. It isn’t a one-size-fits-all approach, however. Traders will use various strategies in search of those returns.
Here are some of the most common ones you can use:
1. Swing Trading
One factor that can influence what strategy is right for you is how long you’re prepared to play the waiting game. In the case of swing trading, this is one approach traders can take if they’re willing to hold tight over the medium term. The aim of this strategy is to profit from ‘swings’ in the price of a particular currency – at least over a two-day period, if not for weeks at a time.
It may be an option if you can’t commit hours of your day to check charts. It can also mean sitting tight when short-term volatility temporarily moves the price against your position.
2. Position Trading
A longer-term strategy that might benefit you is that of position trading. It entails holding your position for weeks – if not months or years. So, a good degree of patience and nerve is a must for forex traders using this strategy.
Your positions are based on the long-term macroeconomic trends that affect the price of the currency – such as interest rates, inflation, or fiscal policy.
3. Day Trading
As its name suggests, day trading is a much shorter-term approach to investing in the markets. It became hugely popular during the pandemic; millions of people using their time stuck at home to invest in the forex market among others.
With this strategy, you won’t hold a position for longer than a day. Instead, the goal is to profit from even the smallest price movements.
In some ways, it can reduce the risk to traders as positions won’t be left exposed by being held open for a prolonged period. It can also generate quicker returns, but the opposite is also true.
4. Carry Trading
Carry trading is a less conventional strategy, and does add an extra layer of complexity to the trading experience. Other approaches are more or less based on a change in the price of any given currency. For carry traders, however, the aim is to take advantage of the difference in interest rates between two countries and their respective currencies.
In practice, a carry trader looks for a currency of a country with low interest rates (such as the Japanese Yen). They’ll then use it to buy the currency of a country with high rates (such as the Australian Dollar). The profit is then made in the difference between those rates of interest.
The best strategy for you is always the one that best reflects your personality and preferences. Before choosing an approach, consider your risk appetite, time constraints, and how much you can afford to invest. These essential factors will help you work out whether you can profit from a short-term strategy – or if it might be wise to sit tight and seek results over the longer term.