Short term trading strategy
If you are opting for a short term strategy in the Forex market, it is essential to understand what you are in for. Unlike the other markets, short term trading in Forex involves making trades and holding positions for only a few seconds, possibly several minutes, but never more than an hour, and certainly not days.
Time is less important in short term trading, what really matters is pip fluctuation. Short term traders are seeking to gain a profit by continuously opening and closing positions after only gaining a few pips. Often as little as one of two pips. Doing this is called scalping. In order to capitalize on this trading style, traders have to be able to make instantaneous decisions, and be disciplined.This often means that scalpers have no allegiance to a specific position, and do not care if currencies go up or down, they just focus on the pips within the next few seconds.
The following are some guidelines for successful trading with a short-term strategy:
1. Trade only the most liquid currency pairs. These are typically the ones with the tightest trading spreads and fewest sudden price jumps. Thus these are the major currency pairs such as the EUR/USD.
2. Trade only during peak times of liquidity and market interest. Because you are only looking to gain a few pips, and hang on to a position for a few seconds, you want consistent liquidity and fluid market interest. This means the best time to trade in the US is from about 2am to noon, ET.
3. Trade only one pair at a time, otherwise it will be too difficult to capture the minute-to-minute price movements, and you will not be able to improve your feel for the pair you are watching.
4. Because things move very quickly with this trading strategy, it is best to preset your default trade size so that you do not have to keep specifying it on each deal.
5. Look for a brokerage firm that offers click and deal trading, that way you are not waiting on execution delays or requotes.
6. Adjust risk and reward expectations to reflect the dealing spread of the currency you are trading. If you are trading in a currency with a larger pip spread, you will need to capture more pips per trade to offset the losses if the market were to move against you.
7. Avoid trading around data releases. If you are carrying a short term position around a data release, things get risky because there can be a big movement or gap when the release happens. This can severely damage your position. Thus, avoid trading 30 minutes before and after data release.
There is a lot of merit to a short term strategy, and with the Forex market, this approach to trading means not having to pay as much attention to the fundamentals of the market. Just remember the above guide for successfully trading in this style.