Two Currency Trading Methods: Which Will You Choose?
The two main currency trading methods we are going to outline in this article are:
- Using Leverage
- Taking Ownership
Once a reasonable amount of experience and knowledge has been gained in the currency trading market (FOREX) it can be very profitable to combine both methods. Here are the main characteristics of each:
1. Using Leverage
Beginners in currency trading will typically find an online broker, open a free demo account, read a manual or take a tutorial, and start practicing speculating skills based on technical indicators.
Through the online broker they are able to use leverage so if they eventually decide to open a mini account, a 100:1 leverage means that with $1 they can participate in the market with $1,000. If in time they graduate to a regular account, 1 trading lot of $10 can be leveraged by the broker so $100,000 can be traded for another currency.
Many newcomers to currency trading concentrate on getting small profits, getting in and out of the trade quickly, usually taking no longer than a few hours at the most. Day trading necessitates learning how to read candle charts, recognizing patterns, and anticipating where price is likely to go.
As many new traders find when they have been currency trading for a while, it is possible to have a succession of losing trades, and without proper equity management, their account can be blown necessitating another cash injection to allow them to trade again.
A series of blown accounts can add up and many view this as part of their currency trading education expenses.
Alternating between a demo account and a mini account can reduce the cost so the new currency trader can regain confidence in the demo before going back to live trading again. Eventually, the hope is that the trader will develop a consistent trading pattern so more trades are won than lost so their equity gradually increases.
2. Taking Ownership
This method of currency trading still requires a learning curve as one has to anticipate the market moves and recognize chart patterns. Unlike using leverage however, the risk of financial loss is smaller and you are not in danger of 'blowing your account.'
It simply means you create a portfolio with whatever funds you wish to commit to currency trading and open bank accounts in each of the currencies you wish to trade.
For example, you may wish to open bank accounts for any of the following:
- US Dollar
- British Pound
- European Euro
- Japanese Yen
- Swiss Franc
Of course, more substantial sums of money are needed to make this method of currency trading worthwhile after taking into account bank transfer charges.
However, if you have x,000 dollars or euros or any of the big five currencies to commit to currency trading this method is certainly worth considering.
After studying technical indicators and learning about support and resistance and Fibonacci calculations, you will soon recognize key patterns on the higher time frame charts. Using daily and weekly charts will bring to your attention currency pairs that are in an up or down trend or pairs that appear to be topping out or reaching a strategic high or low.
If for example the British pound reaches a high against the dollar that is the highest it has been for many years, there is a reasonable possibility that it will not stay at that level. Taking a portion of your equity and buying dollars would make good sense. Within a few days or weeks depending on your profit targets, the pound is like to come down at which time you sell dollars and buy pounds.
For example, with GBP10,000 you purchase dollars as the pound touches 2.000 against the dollar. You now own USD20,000. Within a few days the pound pulls back to 1.9800 at which time you sell dollars and buy pounds giving you GBP10,101 less bank transfer fees.
This is just a quick example of how the ownership method of currency trading works. Of course, the currency may not go in the direction you anticipate in which case your equity will be reduced. You will then need to hold that currency until such time it increases in value. Alternatively, you may see another opportunity involving a different currency cross and be prepared to take a loss in order to use that capital in a new trade.
Once currency trading skills have been acquired, the ownership method can be quite profitable, especially as your equity increases. This method requires patience as ideal setups may not appear very often. But when they do you can commit a reasonable part of your portfolio to the trade with a high probability you will profit.
Currency Trading Is High Risk
Currency trading is viewed as a high risk enterprise, and with good reason. A very high proportion of those who attempt to trade the Forex fail and give up in time, up to 95% according to some authorities. Other veteran traders suggest it can take from a few months to 3 years to gain the necessary skills - quite a learning curve!
Those who have the psychological stamina and determination to ride the bumps, accept the losses, and keep coming back until they are able to make consistent profits, are generously rewarded with a changed financial status.
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