The aim of this article is to provide you with as much information as possible about various techniques and methods which are used in forex trading so that you can make better-informed investment decisions.
The techniques which we will cover here will be:
- Martingale strategy,
- Stop losses,
- Bollinger bands,
- Forex options,
- Moving averages &
- Forex arbitrage
According to this strategy, a trader should continue to increase their investment amount in every new trade after losing a trade. The base for this strategy is a theory which states that it is highly unlikely that a forex trader will incur losses each & every time and again certainly going to happen.
It is a technique that helps forex brokers in reducing risks of loss in a situation market conditions are not favorable. This way stop losses work as a safeguard again unseen variations taking place in the market. Additionally, if the market has not been studied correctly then it is not a wise decision to place one-stop loss for all trades which are executed.
These are helpful in measuring volatility present in the forex market and they also assist forex traders in evaluating how the market is moving. The prices are generally higher in the upper band while the opposite is true for lower bans. These bands are also beneficial in comparing price indicator activity & price actions so that right trading plan can be developed. The Bollinger bands are also used in measuring low as well as high trends in prices and compare with prices for earlier trades.
These are one form of forex trading where buyer has the option of selling the contract before its expiry or holding on to it till expiration & afterward fix a position in spot forex. In addition to it, in forex options the purchaser is required to make payment upfront of premium amount which has been decided.
These are helpful if forex broker is required to track price movements of different nature. To illustrate the point we will look at an example, presume that someone wants to trade in USD/AUD and use 5 minute charts being plotted for closing prices. In such a situation, the 5 minute interval closing prices form a point and help in creation of a chart. If all these points on the chart are linked they form the moving average. The advantage of using these moving averages is that they stabilize price variations as well as bring clarity into charts helping traders use them efficiently.
The term arbitrage normally means sale as well as the purchase of commodities to profit from cost differences present in the purchase & selling prices. Similarly, forex arbitrage means purchase of weak currencies and sale of those currencies which are moving strongly in the forex market. There are different forms of arbitrage usage in the forex market like inter-bourse, cross, and lastly temporal arbitrage.
A Final Note
In a conclusion, we can say that forex trading involves use of many different methods and as a trader, you will have to select those which will yield you the most benefit.