The first six months of 2023 have been turbulent for traders. And especially in forex trading, where interest rates continue to be shaken up by central banks across major economies. The Federal Reserve’s (Fed) rate sits at 5.25 per cent and the European Central Bank’s (ECB) at 4 per cent – with further hikes already seen as inevitable by many market participants.
That said, there’s been major coverage of the looming plateaus in central bank rates, before falling as we move into next year. Of course, understanding when these changes are likely is integral for forex traders to take advantage of major monetary changes and key currency pairs. But it’s a complicated and unpredictable environment.
Catering to this new environment – that is evolving quickly as we race through 2023 – will be integral to coming out in the black. But above all, it means traders need to look at what trading strategies will be best for them over the next six months.
1. News Trading
One strategy that is likely familiar to most traders is news trading. This is a beginner-friendly forex strategy that revolves around tracking news and headlines that have a high likelihood of causing a currency pair to spike or plunge and taking up trade positions accordingly.
It is therefore extremely important when dealing with interest rate changes. However, it can also be useful for other events such as broader monetary policy changes, elections, inflation rates, retail sales, unemployment rates, and consumer confidence surveys. In today’s turbulent environment, this has to be a trader’s bread and butter. It is a simple strategy, used by traders and all levels.
However, any opportunities inspired by news and events are often short-lived and require quick action to capitalise on movements. It’s also important to bear in mind that major news or developments tend to increase volatility in the forex market, and traders should be mindful not to neglect proper risk management when trading on the news.
2. Swing Trading
Another useful strategy in today’s environment is swing trading. This is where a trader identifies an imminent “swing” within a trend, and then enter a trade before the swing occurs, to capture the ensuing profits. These swings can be driven by many of the policy changes or economic reports listed above.
This strategy is often practiced as a medium-term strategy that lasts from two days to several weeks – depending on how long the trend goes on. It can benefit traders because it involves fewer trades and usually takes less time (in comparison to other strategies) as it follows the medium-term and holding open positions overnight or several days.
However, swing trading can be challenging as it means having to deal with short-term volatility. To succeed in this trading strategy, forex traders should be ready to hold their trades for a relatively longer period; closing trades too early will cause the trader to miss out on further gains in the future when the predicted swing occurs. As such, dealing with uncertainty is key. Traders may also need a larger capital pool to absorb price changes that can occur throughout the trend.
3.0 Day Trading
In the current trading environment, day trading can be an appealing strategy whereby a forex trader opens and closes their trades within the same day. No positions are held overnight, and any attempts to capture market returns are made within the trading day itself.
This is done for several reasons. Day trading allows forex traders to potentially benefit from the inherent volatility of the market, which creates opportunities for profits due to the potential for sharp price action to take place throughout the day.
At the same time, it allows traders to avoid risks that can arise from larger price movements on a macro level, or price gapping overnight. The latter can occur when the markets are closed, leaving traders with no way to react.
This is an advanced forex strategy. In order to make profits from relatively small price movements that take place on a single day, the trader usually has to take a higher-risk approach. Success requires in-depth knowledge of the market and world events, and the discipline to stick to an established trading routine while being able to flexibly respond to changes.
4. Grid Trading
Traders can also tap into the benefits of automation, such as in grid trading where a forex trader places multiple buy and sell orders at fixed price levels to profit from market volatility within a defined range. This strategy works by taking advantage of the fact that price tends to move back and forth between defined support and resistance levels.
Traders can predict the impact that news – such as changes to interest rates – will have and generate profits using buy and sell stop orders, aka setting up the grid. What’s more, the actual trades can be automated via the use of trading software, which relieves traders of the stress of having to make multiple trades themselves.
However, this does not mean a grid strategy should be left to run on its own over a prolonged period. Traders must constantly monitor the trade and be prepared to make changes in tandem with market turns. After all, predictions are not always accurate and the market can have surprises in store – the latest US inflation data being a key example.
5. Carry Trading
Finally, traders should consider alternative ways to make returns on currencies. A carry trade strategy revolves around deriving a profit from the difference in yield between two currencies.
To make this strategy work, you have to pair a currency with a high-interest rate (the “base currency”) with another currency with a low-interest rate (the “quote currency”). This works well with several of the most popular currency pairs (AUD/JPY, NZD/JPY, etc.)
However, this strategy must be treated with caution and should only be used if the rates have become more stable. This strategy is highly vulnerable to exchange rate fluctuations and therefore sensitive to market sentiments, which can wipe out gains if not approached diligently. As such, this strategy should be limited when there is a high level of fear or uncertainty.
Explore, learn, adapt
The turbulence in markets presents opportunities. But traders will see greater success if they adapt their strategies. And although new strategies and tactics can be intimidating when first using them, it can unlock new, lucrative ways of generating returns.
That’s exactly why traders must constantly adapt, educate themselves, and try out new tools across the platforms they use. Trading platforms are constantly innovating and introducing new features designed to make the trader’s life easier, so it’s important to keep on top of platform upgrades as well as the different strategies that can be deployed.
David Shayer is the UK CEO at Vantage, a position he has held since January 2019. David has 24 years’ experience in Financial Services and has worked across both buy and sell side, including senior roles such as CEO, COO / CFO, and Head of Compliance. At Vantage, David works closely with his team in the UK and head office in Australia to implement Vantage’s ambitious UK growth strategy, leveraging his experience to ensure robust corporate governance and making full use of Vantage’s FCA licence.
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