Forex trading can be as simple or as complicated as you want it to be. In the beginning forex trading seems like it is simple. It seems like your only job as a trader is to pick what direction a currency pair is going to go and collect your profit. Or, maybe you are thinking of trying to find a 100 percent accurate forex trading system on the internet. If only it were that simple.
Hedging is a way to reduce risk by taking both sides of a trade at once.
If your broker allows it, a simple way to hedge is just to initiate a long and a short position on the same pair. Advanced traders sometimes use two different pairs to make one hedge, but that can get very complicated. For example, say you decide that you want to go short on the USD/CHF, because you see it sitting at the top of a recent price range.
You decide to initiate your short. After setting up your short, you start thinking that the USD/CHF is looking a little strong and you think that it might break upward and make your short an expensive one. To do an advanced balancing act, you start looking at other USD pairs. You find that the EUR/USD tends to move inversely to the USD/CHF. To complete your hedge, you go short on EUR/USD. The USD ends up breaking resistance and moves strongly against the CHF. Your short EUR trade becomes a winner and your USD/CHF trade is a loser, but your risk is limited because they almost even out.
Position Trading is trading based on your overall exposure to a currency pair. Your position is your average price for a currency pair.
For Example, you might make a short trade on EUR/USD at 1.40. If the pair is ultimately trending lower, but happens to retrace up, and you take another short at say 1.42, your average position would be 1.41. Once the EUR/USD drops back below 1.41, you will be back in overall profit.
A forex option is the agreement to purchase a currency pair at a predetermined price at a specified time.
For example, say you are long the EUR/USD at 1.40 and you feel that there is a chance that it will fall to 1.38 in overnight trading. Not wanting to risk a deeper reaction, you decide to put a stop at 1.3750, setting up a potential loss of 250 pips. 250 pips sounds really painful, so you decide to use a forex option to lessen the pain. You purchase an option for the overnight hours with a strike price of 1.3750. If the EUR/USD goes up and never touches 1.3750 overnight, you would lose the premium that you paid for your currency option. If the EUR/USD falls and touches your option and your stop loss, you would receive the profit from your option, depending on how much of a premium you paid, and you would realize the loss of your long trade on the EUR/USD. The option profit would make up for some of that loss on your currency trade.
Scalping is making a very short term trade for a few pips usually using high leverage. Scalping typically is best done in conjunction with a news release and supportive technical conditions. The trade can last anywhere from a few seconds to a few hours. Many beginning forex traders start with scalping, but it doesnÃ¢ÂÂt take long to figure out how much you can lose if you donÃ¢ÂÂt have any idea what you are doing. In general, scalping is a risky strategy that does not pay well in comparison it's risk. If you are going to make scalping trades, it is best to do them in conjunction with your overall trading position, not as a primary method of trading.
Advanced forex trading is about seeing all your options when you make a trade. Aside from using masterful risk management and extreme caution, advanced trading can be an alternate way to make profits and control losses. Advanced trading techniques are just about using the markets behavior to your advantage. Learning to use advanced techniques properly is what will give you the edge that will make you stand apart from the average trader.