Trading strategies for Forex CFDs

In this article, Psi Markets discusses Forex trading through CFDs (Contracts for Difference). Learn more about the methodology and basics of CFDs in our introductory article.

Ways to trade on Forex

Forex trading works very similar to trading stocks and bonds. Among the most popular Forex options is spot trading. In it, you use one currency to buy another currency at the current exchange rate between them. Therefore, you own the value of the currency purchased, whether physically or in a digital wallet.

In spot Forex, the value of the currency you own needs to strengthen against other currencies. For example, you can use euros to buy the US dollar and, when the US currency appreciates, convert your purchase back to euros, only this time receiving a larger amount of euros. This is the traditional way of trading Forex, but it lacks volatility.

Factors that influence Forex quotes

A country’s currency is protected by huge foreign exchange reserves held by powerful central banks and monetary authorities. Because of this, fluctuations in data indicators have a minimal effect on a currency’s quote. Instead, Forex is a field largely influenced by macroeconomic data.

Before you start trading Forex, especially in the fast-paced and potentially high-risk world of CFDs, consider the following elements that determine Forex quotes:

Political stability

Foreign investment is crucial to strengthening any national currency. To be an attractive investment destination, the country needs to present itself as an environment of political and social stability.

Economic performance

Closely linked to political stability, positive economic performance is an indication of efficient policy. Since most state policies are long-term visions for generating economic success, their effects are readily felt in the country’s economic strength. Such positive performance invites the contribution of national and international investments.

Current account deficit

A country’s current account is a measure of the value of its goods and services. It is made up of what the country buys from its foreign trading partners in relation to what it sells to them. A positive current account means the country is receiving more foreign currency than it is spending. A current account deficit indicates the opposite, and usually means that the country is failing to produce valuable goods and services.

However, there is an exception to this rule. Emerging economies, where large portions of the population are joining the middle class and acquiring purchasing power, could see their scales tip towards the red. However, this willingness to spend is good for the country and could ultimately strengthen its currency.

Relative inflation

Historical evidence shows very clearly that inflation is inevitable. This means that the true value of each unit of a currency is gradually falling. Thus, the ability of a country to maintain its inflation rate below the world average, especially in comparison with major currencies, is the harbinger of a strong national currency.

National interest rates

High interest rates are good for banks and other financial institutions, which lend to individuals and companies. Central banks typically lower their interest rates when the country is in financial difficulties to prevent an increase in defaults. Since there is a strong correlation between the strength of a country’s banks and its economic resilience, high interest rates indicate a strong currency.

The release of new macroeconomic data numbers could cause significant changes in all markets, including Forex. It is always prudent to include stop loss and/or takeprofit points in your trades to minimize the risks involved due to the nature of leverage.

Basic Forex Trading Strategies

As with any other instrument, there is no one-size-fits-all approach to success in Forex. An individual’s psychology, their resilience to setbacks and their appreciation for success, as well as their ability to follow a plan, affect the composition of a good strategy.

There are three different strategies for trading Forex based on time frames.

Daily trading

As the name suggests, this mode means entering a forex position and closing it before the end of the trading day. However, day trading can be even shorter, lasting an hour or a few minutes.

This strategy is popular among Forex beginners as it opens up the opportunity to familiarize themselves with general currency trends. As Forex trading continues across different time zones, day trading also protects the investor from large changes that can occur from one day to the next.

Position negotiation

Position trading is a favorite among CFD traders, whose research leads them to believe that a particular currency will gain sufficient value in the future as a result of developments already underway at the moment. It is also an attractive option if you want to deposit your money in a “safe” currency for the long term.

Swing Trading

If you look closely at Forex charts for any currency pair, you will notice that there are small corrections and reversals within of each general trend. These differences present a considerable profit opportunity, as trading against the trend is typically unpopular. Traders of this type consider periods of hours or days.