The world of Forex trading is abundant with economic terms, market-changing events, trading strategies, indicators, and other tools that you, as a trader, will be using pretty soon. If you are starting to get involved into it, you should probably learn about the differences between short-term and long-term trading. We will start from the former and introduce you to the main strategies that are used here.
Not every trader chooses short-term currency trading over long-term. For a start, we want to emphasise the fact that, to be successful in Forex trading (and trading in general), one needs to practice discipline, self-organization, and do a lot of planning ahead.
This applies to short-term strategies as well. Knowing the theoretical basis is not enough, as a lot of trying and testing is usually involved. Thus, every trader should design or adapt a particular method that suits him/her the best.
While there are numerous ready-to-apply short-term currency trading strategies, one should take them with caution. First of all, everyone has their own trading tempo and style. For instance, adapting a long-term strategy would be unwise if you lack the advanced level of patience.
Also, markets are always changing, which is why a rigid strategy would rather do harm to your financial well-being. This is why it is crucial to find and utilise your own method when trading Forex short-term or even long-term.
Of the two general types of traders, there are those who use short-term Forex trading methods—they are also called day traders—and those who employ long-term strategies—they are called position traders. Day traders compose the majority of all traders; they work with the day's volatility and make their trades during the day. They do not keep their positions open, so that they are not affected by Swaps which occur in case of long-term trading.
As compared with their counterparts, day traders do not get big profits, but they make a significant number of trades. Instead, their objective is to get as many successful trades as possible and to keep generating profit. In this article, we will focus on the concept of short-term FX trading, the most useful strategies and methods that day traders choose, and provide you with tips on how to use them.
Short-term trading refers to trading for periods, each lasting no more than a day. However, this can vary, and trades might be regarded as short-term even when a trading position lasts for several days. What's less than a week can be considered short-term. Long-term trades – or positional ones – are those which continue over a months, and everything that's in-between is called medium-term trading.
The core idea of short-term Forex trading is to adopt a strategy which will allow a trader make as many entries as possible during very short time frames usually ranging from 1 to 30 minutes (M1 to M30). Short-term trading is done during the periods with the greatest volatility, and mostly during the period of the European session (around 7a.m. till 4p.m. UTC on weekdays).
While there are strategies where traders take guidance from technical analysis, there are also those which are event-based (such as when major economical or political events take place). In short-term trading, technical analysis is more important.
If you manage to shape your personal short-term Forex trading strategy that takes into account both and serves you well, it will be only beneficial. Still, we will offer you some of the standard strategies below, from which you can learn or take isolated elements for creating your own.
Before getting to view the day trading strategies, we would like to emphasise that they are just general models. You will do much better if you test them first (normally, brokers offer you a demo account for this purpose) and then will be able to come up with your own trading methodology and set up your trading account.
Below, we will touch a number of terms that are common in trading, some of which will be left unexplained. Our task now is to provide an overview of the most common types of the short-term Forex strategies. We will stop on scalping as the universal one.
One of the most loved and used short-term Forex strategies is called scalping. It can be described as follows: you mark out a few pips and try to get a positive result, usually by opening and closing positions within the time frames of 1 to 5 minutes (M1–M5).
An important condition is that your stop-loss orders are set low, and your take-profit orders are set high. If you utilise the scalping strategy correctly, you will most likely gain profit of around 5 to 9 pips, while losing 2 to 5 pips.
There is one main condition under which you can trade short-term efficiently and beneficially. It is that your broker should offer ECN (provide you directly to other market participants) or at least STP (partially connect you to the real market). If it is a MM-only broker, then your scalping will not bring that good results. Fortunately, platforms like Admiral Markets offer accounts with different types of execution.
Another essential condition for successful scalping is bid and ask spread, which is a mere discrepancy between the ask price and bid price. This is because, the more you pay per trade, the more pips should a trade bring you to consider the trade successful. Shall we see how the scalping short-term currency trading strategy works in detail?
We have mentioned the European session above as the most common for day traders. Let us see a simple example of utilising one of the short-term Forex trading strategies (scalping) that involves it.
If you are trading during the European sessions, the currency pair of your choice is probably EUR/USD, as it is one of the most permanently volatile pairs with bid-ask spreads rather low. After you have preset your signals for entry and exit, you start waiting for the former.
Say, the price of EUR/USD is 1.255, this is at what you buy your currency once you spot a long entry signal. You will have a floating loss immediately, and your only option is to sell your currency at lower price; your only way out would be a market move.
Or the spread, which can change the whole situation.
With spreads of 3 pips that most brokers offer on the EUR/USD pair, you will either lose 30 USD or recover your costs. If your broker (Admiral Markets, for instance) offers flexible spreads that can be as small as 0.1 pips, you can avoid high losses. This will also provide you with a good opportunity to try your strategy in practice in the real market conditions.
You close your trades when the stop-loss point or take-profit point is reached, or when you recognise an exit signal and close the position on your own. It is either that you make the desired (expected) profit or avoid losing more than is acceptable for you. You can set any number of pips as your target — a smaller number is better if you don't want to risk losing much.
This is basically what the process of short-term trading usually looks like. If you choose scalping as the best short-term Forex trading strategy of your choice, then you should stick to it. This will be perfect tool to practice your trading skills and—most importantly—your trading discipline. By making a great number of entries and exits over a small period of time, you will get trained in trading Forex rather quickly and effectively.
Hopefully we've answered the initial "How to trade Forex short-term?" question. The main thing to remember is that you have to practice self-organization and discipline. You should always observe the rules you have preset, in order to avoid risks and losses.
While you don't lose too much in short-term trading, you must remember that your losses will only accumulate, which is highly undesirable. Particularly for this purpose, you have such tools as stop-losses that will help you to close the trade even when you get carried away with your hopes for a higher profit.
These are the basic rules that you should follow when you trade currencies short-term.