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Understanding the Different Types of Forex Trading

Introduction 

The Forex market is one of the largest financial markets globally. Its participants include central banks, commercial companies, retail Forex brokers, investors and more. Forex trading can offer you high returns. However, the Forex market is highly volatile and involves higher risks. 

All Forex trading takes place in currency pairs. Currency pairs include two countries' national currencies for trading on the Forex market. There are three currency pairs- minor, major and exotic. Major currency pairs are the most commonly traded currencies and always include the U.S. dollar. Minor currency or cross-currency pairs do not have the U.S. dollar. However, they include one of the three major currencies of the world.  Exotic currency pairs mix one of the eight major currencies and one currency from an emerging or developing economy. 

In this article, you will learn about the different types of Forex trading to make an informed decision before entering the Forex market. 

Types of Forex trading 

Here’s a list of the four types of Forex trading: 

1. Position trading

Position trading is concerned with long-term price movement. Hence, this trading approach aims to gain maximum potential benefits from significant price shifts. Consequently, trades can extend over weeks, months or years. In this type of Forex trading, you can use weekly and monthly price charts to evaluate the markets. You can use a mix of fundamental analysis and technical indicators to know the potential entry and exit levels. 

Position trading does not require you to focus on minor price fluctuations or monitor the positions frequently like in other trading strategies. You can occasionally monitor the positions to identify a major trend.

2. Scalping 

Unlike position trading, scalping is the most short-term trading. You can hold positions for a short time, like seconds or minutes and make quick trades to gain smaller profits. This type of Forex trading focuses on small intraday price movements. 

Scalping needs liquid markets and tight spreads. Hence, you need to focus on major currency pairs only. This is because major currency pairs have high trading volume and are more liquid. Furthermore, scalping is more beneficial when you trade at the busiest time of the trading day due to higher trading volumes. Unlike position trading, you need to focus on charts for multiple hours in scalping, which can be stressful and time-consuming. 

3. Day trading

Day trading in the Forex market involves entry and exit from positions on the same day. You can choose this approach if you are uncomfortable with scalp trading and wish to avoid large overnight movements in price. You can hold trades for minutes or hours in day trading to make small gains. 

You need to monitor the positions frequently throughout the day. At the end of the day, you can close positions either with a profit or a loss. In day trading, technical and fundamental analysis is essential in recognizing Forex market conditions and trends. 

4. Swing trading

Swing trading involves holding positions for days or sometimes for a few weeks. Since positions are held longer, you do not have to monitor the charts throughout the day constantly. Some common swing trading strategies include trend trading, momentum and breakout trading, and counter-trend trading. 

Swing trading is suitable if you cannot monitor Forex charts throughout the day due to other commitments. 
 

Type of Forex trading Period of trade
Position trading Weeks, months or even years
Scalping Seconds or minutes
Day trading Maximum one day
Swing trading Several days and sometimes a few weeks

Conclusion 

The foreign exchange market is lucrative for institutions and individuals. It is highly liquid, allowing you to enter and exit trades quickly. Also, you can begin with small investments and hold larger positions. However, the Forex market is highly volatile, and exchange rates and prices fluctuate frequently. It is important to identify the potential risks of foreign trading to make informed decisions. You may incur losses if you lack expertise or indulge in impulsive trading. So, you must have a sound knowledge of the fundamental and technical analysis to evaluate market conditions.

 

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