Forex Trading Strategies - Going Beyond The Spot
The most common method of trading forex is simply to open spot positions
. Using MT4 or what every platform your broker uses, you simply open your long or short on the currency pair.
While that "strategy" has it's merit, the truth is that the forums are RIFE with traders looking for viable information on hedging. The problem is that few brokers actually allow it due to NFA rules (even those not in the US) and of those that claim they do allow it, the implementation is poor at best.
Therefore, let me explain how to trade Forex in a way that allows you to hedge WITHOUT stripping clean nearly all of your profit.
Forex Trading Strategy #1 - The Option Cover
In this strategy, what you will do is decide which way you think a given currency pair will go, and you will open your position as you always would.
What you do differently is that you then either buy a call or put option on the same currency ... but for the other direction. Because you're dealing with an option, your actual "outlay" and risk is much less. But so is the profit you stand to make on it.
What this strategy does is allow you to "hedge" your regular forex position so that if the market moves against you, you can GREATLY mitigate the loss of that trade.
Forex Trading Strategy #2- The Back Spread
This strategy also uses options. In the first strategy, you would look for options that are "close to in the money" to trade. In this one, you are going to look for "far out of the money" options.
The beauty of this strategy comes during highly volatile market conditions. If the market is volatile and moves strongly against you, it is possible to find yourself in a position of winning no matter what happens.
A far out of the money option will have a significant payout if a volatile market suddenly shoots against your spot trade strongly enough to get the option close to the money, or in it. You can literally find that because the market shot strongly against you (hopefully you see that and exit out of the losing spot trade) that the option payout is quite significant.
The best times to trade this strategy are right BEFORE a news release that you believe will significantly cause market volatility. Because the release hasn't come out, you have no way of knowing what it might say. However, if you are correct that it will drive huge activity, you can cover yourself simply by opening a spot trade in one direction and a far out of the money option for the other direction.
Now you wait for the release to come out, see what the market does, and you exit one of the positions depending on which way the market moves.
Forex Trading Strategy #3 - The All Option Play
One things that has continually baffled me is how few forex traders bother to consider currency options (or currency futures) in their trading. There is preciously little difference, yet including options/futures as part of your arsenal of forex trading strategies gives you many more ways of opening up avenues of trading profits while also mitigating loss.
You can actively trade currencies without ever opening a spot forex trade ... and some of the most profitable currency traders that I know have utilized options/futures on currencies EXCLUSIVELY for years.
Here at the Trading Strategies Magazine we intend to provide you with an increasing array and variety of forex trading strategies that will include options and futures - including explanations of the tactic.
This will include some basic education on options and futures themselves.
by: Brian Sidwell
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