Spread Trading Strategies for Currencies

Spread Trading Strategies for Currencies

There are literally thousands of spread trading strategies for currencies. Which one you choose to use in your spread trading is really only a decision that you can make based on your personal goals, risk tolerance and trading personality. There are, however, several things to consider to guide your decision amongst the multitude of spread trading strategies available and which may help you to choose one which not only fits you currency trading style but may also prove to be profitable.

The first consideration in selecting a spread trading strategy is which currency pair or pairs you will want to trade. Currency pairs have different spreads, volatility and are sensitive to different data as well as being correlated to one another. For example, if you are looking for a spread trading strategy that uses tight stop losses then you would benefit from looking to trade the 1 pip spreads of the EUR/USD or the AUD/USD. If you tried to employ a spread trading strategy with a wider 3 pip spread, such as the GBP/USD (Cable), you will enter the market closer to your stop and increase your chances of being stopped out. Similarly, if you are looking to trade quickly throughout the day then a slower moving pair such as the EUR/GBP may not provide you with the same opportunities as, say the GBP/USD or GBP/JPY which often have higher volatility and price movements.

Another factor that needs to be considered in applying spread trading strategies for currencies is the time frame that you are looking to trade. If you prefer to trade fast and throughout the day then you obviously need to be looking for spread trading strategies for currencies that are suitable for the lower timeframes such as the 3 and 5 minute charts. It will also be important to look at which currencies you are wanting to trade to make sure that you are going to be trading during open market hours when the most opportunities for spread trading exits. Similarly, if you are looking for a swing trading strategy then you are going to be operating on higher timeframes, perhaps looking for trades on the hourly, 4 hourly or even daily charts. Trading strategies are often designed and tested on a specific timeframe and during particular market hours of the currency pair concerned.

Spread Trading Strategies for CurrenciesMany manual trading strategies for forex use a combination of indicators or price action techniques. It will be helpful to know which form of trading better suits your trading personality where choosing or developing a trading strategy. If you prefer mechanical trading signals then trading with indicators may be a more suitable option as they can highlight spread trading opportunities and remove much of the subjectivity of price-action trading. Very simple mechanical methods include moving average crossover trading systems which literally signal a higher-probability entry into a currency trade when the short period moving average crosses over a longer period moving average. Although this method is often statistically profitable, it may require an extra indicator as a filter to distinguish between the many signals generated per day. Often the trading strategies for currencies using crossover methods require a momentum indicator, such as a stochastic oscillator, to confirm that the crossover ma be the beginning of a larger move in price.

Price action spread trading strategies use the identification of key areas of support and resistance in order to determine when a trade may be high probability. By marking the areas where large amounts of buying and selling has occurred previously on a price chart (areas of support and resistance) spread traders wait for the markets to once again react at these levels. Traders can then watch for familiar candlestick or bar chart patterns at these levels to accurately predict a high-probability that price will move in the same way as before. Using support and resistancestrategies for currency trading can be fairly subjective and it takes some practice to get used to marking which areas on your charts are the most likely to influence price. However, one you have learnt master price action trading strategies you will be able to see lots of opportunities for profitable trading each day.

The temptation for many traders is to purchase trading strategies for currencies which claim to make a certain percentage in profit on a consistent, and even daily basis. These are often ‘black box’ strategies, known as Expert Advisor’s (EA’s), which promise to automatically turn your small investment into huge levels of wealth. They often run at night and do occasionally perform well, if the market conditions are right. However, often these are only designed and tested in optimum market conditions and spread trading strategies for currencies which use these rarely perform over the medium to long term. It is important to ask yourself why someone is selling a system for a few hundred dollars that is capable of what it advertises; for most traders having such a spread betting strategy would be a very closely-guarded secret.