Sunday, December 8, 2024
Finance & Lifestyle

Smart Forex Trading Strategies for Savvy Investors

Forex remains a market with the highest trading volume (trillions of dollars daily) and many participants. While many are considered speculators, others adopt more innovative approaches prioritising risk management.

Being an Investor in Forex

Most experts consider forex a riskier investment than other assets like stocks and bonds. One reason is the speed at which exchange rates change. These movements are challenging for the average person to predict in a reasonable time. Many label forex as speculative trading, where traders take high risks for high rewards, and since forex trading allows anyone to maximise their investments correctly and skillfully, it’s vital to use a savvy trading strategy and improve your risk management.

Another issue lies in the core of trading versus investing, which are different concepts despite being often interchangeable. Rarely do we think in terms of ‘forex investing.’ Ultimately, the currency market is designed for short-term price movements due to the frequent changes in the exchange rates. Such a nature describes trading, where participants take multiple positions intending to liquidate them at will.

Meanwhile, pure investing involves a more buy-and-hold approach, where investors participate less frequently and employ a long-term outlook. These are called ‘position traders,’ who hold trades for an extended period (usually from a few months to years).

Thus, being an investor in the traditional sense within forex may clash against the norms of this market. Thankfully, there are strategies which can achieve long-term results in the world of currencies.

Top Forex Trading Strategies for Investors

Let’s cover popular trading strategies that investors can use in forex.

Moving Average Trading System

Trends are among the most crucial concepts to comprehend in forex trading. They come in various time scales, from a few seconds to a few years. The moving averages are at the heart of identifying the predominant market direction (i.e., the trend).

Such a technical indicator shows a constantly updated average price a market has closed or opened over a specific time. Investors will want to pick a high period, most popularly 200 days.

It’s considered a downtrend when the market is below the 200-day moving average. Conversely, it’s an uptrend when the market is above the 200-day moving average.

Given the substantial period, trends shown by this moving average are generally strong but require much patience to materialise.

Carry Trade

Carry trading is where traders capitalise on interest differentials, buying a currency with a higher-yield interest rate against another with a lower-yield interest rate. Traders earn swaps for each day they hold this position.

The longer the holding time, the more the accumulated swaps. Carry trading is a neutral strategy where traders are less concerned about picking the right direction but hope that the accumulated interest covers potential losses.

The main downside of carry trading is that most first-world countries have low interest rates. However, investors can find opportunities with currencies paired against the Japanese yen, whose central bank has kept near-negative interest rates. Another alternative is to consider exotic currencies that less mainstream economies like Russia, Argentina, Mexico and Brazil use.

Purchasing Power Parities

Taking advantage of purchasing power parities (PPP) is another clever yet intricate long-term strategy in forex. PPP is the ratio at which the average price of goods and services will be equalised between two nations. This is measured by the Organization for Economic Co-operation and Development (OECD) with substantial statistical information.

In the forex context, inflation rates are a crucial element in determining the PPP. Countries with lower inflation offer cheaper imports to foreign importers, meaning a more in-demand currency. The opposite is true for nations with higher inflation.

Currencies trading below the PPP are ‘undervalued,’ while those above the PPP are ‘overvalued.’ Investors must buy or sell the forex pairs according to these differences.

Tips on Effective Forex Risk Management

Proper risk management is often the make or break for success in forex. Here are pointers one should implement.

  • Using disposable funds: While the statement ‘never invest more than you can afford to lose’ is cliched, it’s one of the basic principles of all investments.
  • Keeping conservative position sizing: Another fundamental principle of trading in any market is allocating 1–3% of your account to any trade. This gives the investor enough chances to keep trading, which is impossible with unusually large positions.
  • Use the least amount of leverage: Forex is among the most leveraged trading, contributing to sudden, massive losses. Thankfully, investors aren’t obligated to use all their leverage, instilling the discipline necessary to trade with reasonable position sizes.
  • Use a stop loss: When set correctly, a stop loss is a protective measure that keeps losses consistent and manageable.
  • Keep an eye on news and events: The forex market is sensitive to economic announcements, such as interest rate decisions. Investors should always consult an economic calendar before making their trades.

Finally, education (through webinars, e-books, and events) is also necessary for risk management and forex trading with many brokers, such as OANDA and others in the business.

Combining Strategy With Risk Management in Forex

While forex is a hugely popular financial asset, its design could be more investing-friendly. Still, investors can adopt several strategies like trading with moving averages and the carry trade for long-term success. Solid risk management is also a critical piece to the puzzle by understanding concepts like conservative position sizing and using a stop loss.