Advanced forex trading demands fundamental and/or technical analysis skills to trade profitably. Explore some of the more advanced forex trading strategies to help you navigate this volatile market.
What is forex trading?
Forex trading is when you take a position on the price movements of currency pairs. Trading forex is done for practical reasons, but also to generate profits.Even experienced forex traders keen to learn about more advanced forex trading strategies need to ensure they’re familiar with the basics and have a solid foundation.
When trading forex, you’ll always use a currency pair, which measures the exchange rate between two currencies.
If, for example, you buy the EUR/USD pair, then EUR is the base currency and USD is the quote. You’ll buy the forex pair if you think the base currency will rise against the quote currency. You’ll sell if you think the opposite will happen.
Continuing with the example above, you’d buy EUR/USD if you thought the euro would rise against the dollar and sell if you believed the opposite were true.
At a simplistic level, it may appear the only job in trading is to pick the direction of a currency pair and collect the profit. However, there are some strategies on how to enter and exit a trade you can use.
Hedging forex is an advanced trading technique that mitigates risk. You hedge your profits or losses from your open position. Note that while hedging enables you to reduce your potential losses, you won’t usually make a profit.
Hedging involves selecting two currency pairs that are positively correlated, such as GBP/USD and EUR/USD, and then taking positions on both pairs but in the opposite direction.
For example, say you’ve taken a short position on EUR/USD at the top of a recent price range, but the currency pair is looking strong, threatening to break upward.
You could then decide to hedge your USD exposure by opening a long position on GBP/USD. If EUR/USD were to advance further, i.e. the US dollar fell, your long GBP/USD hedge would offset any loss to your short position. If the euro did fall against the dollar, your long position on GBP/USD would have taken a loss, but it would be mitigated by profit to your EUR/USD position.
Note that the net profit of the two trades may be below zero while both your positions are open. However, you can make more money by timing the market just right – without closing the initial trade and only putting the offset currency pair position, in the above example GBP/USD, on, once you are in profit on the original position, thus in effect securing your profit until that point. Hedging can also be used to protect yourself against a big loss – much like an insurance policy against an expensive car accident.
Position trading is when you ‘buy and hold’ a trade over the long term, such as over months or years, depending on your strategy. Based on the long-term nature of this type of technique, you’d use fundamental analysis, such as a country's economic data, central bank monetary policy and macro-economic outlook within your strategy.
If you choose to trade long-term, you must ensure you’ve got sufficient funds in your account. These should cover swings in the short term and avoid margin calls.
Position trading is based on your overall exposure to a currency pair. You’ll take a position on the price movement of the forex market using CFDs.
There are several technical indicators you could use under this technique such as trend trading where, for example, moving averages are used to enter or exit a trade. Support and resistance in forex trading is also another technique to look at.
Ichimoku clouds are a technical analysis tool that combines multiple averages and looks at market trends, momentum and several other data points. You use this indicator by plotting these five calculated lines on a price chart:
- Tenkan-sen, which is the conversion line
- Kijun-sen, known as the base line
- Senkou span A, known as the Leading Span A
- Senkou span B, known as the Leading Span B
- Chikou span, known as the lagging span
Once your software calculates and plots the lines, the chart reveals a ‘cloud’ that can be used as a technical indicator. It enables you to see at which point a price might find support or resistance. For instance, an uptrend would be confirmed when Leading Span A (Senkou span A) rises above Leading Span B (Senkou span B) and forms a bullish cloud. Similarly, a downtrend is confirmed if the Leading Span A is falling and drops below the Leading Span B, forming a bearish cloud.
If you look at the position of the candlestick and it’s above the cloud, then the price will most likely move up. When the price is below the cloud, the trend is most likely moving downwards. On the other hand, if the price is inside the cloud, then the market is in a state of transition.
The Ichimoku cloud technique is an advanced trading strategy that with practice, you’ll find tends to increasingly become easier to use.
Trading forex options
Trading forex options is a means of securing the right to purchase or sell a forex pair at a specified time and at a particular price. As opposed to you settling the transaction at the outset and paying the value across to a third party, forex options give you the choice to purchase or sell at a later date.
In addition, you’re not obliged to ‘exercise’ your option - and thus put into effect the right to buy or sell the underlying forex pair specified in the options contract - if you choose not to. In this case you’ll only lose the ‘premium’ you paid for the option, i.e. your initial deposit, and your risk is capped at that amount.
A forex option is an agreement to purchase a currency pair at a predetermined price in the future.
You may take a long position on the EUR/USD pair at 1.20 but shortly afterwards worry that it may fall to 1.18 in overnight trading. Not wanting to risk too much of your capital, you can decide to place a stop loss at 1.1750, limiting the potential loss to 250 pips.
Instead of using a stop loss you can purchase an option for the overnight hours with a strike price of 1.1750. If EUR/USD never touches 1.1750 overnight, the only loss would be the relatively small premium paid for the currency option compared to the profit your long EUR/USD position is making. If, however, EUR/USD were to fall to 1.1750, your 250 pips loss would be reduced by the profit you made on your option.
Scalping in forex trading is a style involving you opening and closing multiple positions, lasting seconds or minutes, on one or more currency pairs over the course of a day. Rather than opening a position at the start of a trend and closing it at the end, when scalping you’ll open and close several positions throughout a trend’s course.
There are several indicators that you can use as part of your forex scalping strategy. These include the use of the Bollinger Bands to indicate areas of market volatility, while moving averages enable you to spot common and emerging market trends. Another indicator is the stochastic oscillator, which compares a forex pair’s current value to its range over a recent period.
Your objective is to gain just a few pips at a time, looking for multiple small gains rather than fewer larger ones. A ‘pip’ denotes a change in price at the fourth decimal place. For example, if the quoted price of a forex pair decreases from 1.3981 to 1.3980, it has fallen by one pip.
Scalpers often use CFDs to trade forex pairs that are rising or falling in value. You’ll open a position to ‘buy’ (go long) if you think the price will rise and open a position to ‘sell’ (go short) if you think the price will fall.
Leveraged products like CFDs enable you to open a position with a deposit, called margin. Your profit or loss is calculated upon the full value of the position, which can amplify your profits – but also magnifies your losses. Therefore, it’s important to have an appropriate risk management strategy in place, no matter which scalping techniques you’re using.
Nonfarm payrolls (NFP) trading
NFP is one of the most anticipated indicators of US economic growth in the global forex market. The NFP report shows the number of jobs created in the United States in the non-agricultural sector during the previous month.
This nonfarm employment change report reflects the level of activity and health of the American economy, which is often factored in by people or institutions when deciding on whether to invest in US dollars vs other global currencies. When more people want to buy the US dollar, the value of the currency rises, and vice versa.
The monthly NFP data release is important to forex traders as it often creates volatility and enables you to trade on the market reaction to the report, and to leverage your exposure with CFD trading. In doing so, you also have access to extended hours trading on US markets and can trade out of hours on over 70 key US stocks and indices.
How to start trading using advanced forex techniques
- Open a CFD account to trade forex or practice on a demo account
- Pick the currency pair you want to trade
- Choose the way to trade your forex pair – futures, spot or options
- Place your trade
- Monitor your position
With us, you can trade using advanced forex techniques via CFDs.
Trade futures with us by locking in current forex market prices until you exchange them at a set date via your CFD trading account. With us, you can take a position on the price of forex futures using leveraged products like CFDs.
When trading with leverage, you’re relieved of any obligation to buy and sell the underlying forex since you won’t be taking outright ownership of the asset. Leverage will magnify your profit, but it’ll also amplify your losses which may exceed the initial deposit – manage your risk carefully.
Spot forex trading
Spot forex trading is buying and selling with the intention of taking delivery of the currency pair immediately or ‘on the spot’. It’s popular among day traders, as they can open short-term positions with low spreads and no expiry date.
You can also trade the spot forex market using leveraged derivatives such as CFDs. In that case, you won’t take ownership or delivery of the underlying currency. But you can still benefit from real-time, continuous pricing that reflects the underlying market.
You can open a position using a deposit – called margin – which, at the fraction of the underlying market, will increase your exposure to the full value of the market. Note that CFDs use leverage, which can potentially magnify your profits if the market price moves in your favour or amplify your losses should it move against you. Manage your risk carefully.
Forex options are derivative products that enable you to buy and sell currency pairs without being obligated to adhere to an expiry date at a specific or strike price There are two forex option types – puts and calls. With us, you can trade forex put or call options.
A put option is a contract that will give you as the buyer the right but not the obligation to sell forex at a specific price and expiry date. While a call option will give you the right but not the obligation to buy forex at a specific price and expiry date.
The value of a put option increases if the asset's market price depreciates. The put option’s value will increase if the forex market price depreciates. On the other hand, a call option’s value appreciates if the forex market price increases.
CFDs, as leveraged products, will require that you pay an initial deposit or margin to take your position and gain exposure to the forex market. Trading with leverage will amplify your profit or magnify your loss in excess of your initial outlay, remember to make use of our risk management tools.
Advanced forex trading techniques summed up
- Forex trading is the act of making a prediction on the price movements of currency pairs
- Advanced forex trading is about having the ability to use multiple tools when you make a trade
- Advanced forex trading involves the use of a selection of the following techniques: hedging, position trading, FX options, Ichimoku clouds, NFP trading, and scalping
- Advanced forex trading is about using any of these techniques when placing a trade as an alternate way to make profits and control losses
- With us, you can trade using advanced forex techniques via CFDs
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