How To Join Forex Trading – Currency options are relatively unknown in the retail currency world. While some brokers offer this alternative to spot trading, most do not. Unfortunately, this means that investors are missing out on opportunities.
Currency options can be a great way to diversify and even hedge an investor’s spot position. Or they can also be used to speculate on long-term or short-term views of the market, rather than trading in the spot currency market.
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Structuring currency options trades is actually very similar to stock options trades. Complex models and math aside, let’s take a look at some basic FX options settings used by both novice and experienced traders.
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Basic options strategies always start with simple options. This strategy is the easiest and simplest trade, in which the trader buys an outright call or put option to express a directional view of the exchange rate.
Placing an open or open option position is one of the simplest strategies when it comes to FX options.
A double top AUD/USD chart that is perfect for a put option. Image by Sabrina Jiang © 2020
Looking at the chart above, we can see that resistance has formed just below the key exchange rate of 1.0200 AUD/USD at the beginning of February 2011. We confirm this with a technical double top. This is a great time for a put option. A currency trader who wants to short the Australian dollar to the US dollar simply buys a simple put option as shown below:
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The profit potential of this trade is endless. But in this case, the trade should be set to exit the trade at 0.9950, which is the next major support barrier for a maximum profit of 250 pips.
In addition to trading a simple option, an FX trader can also create a spread trade. Traders prefer spreads that are a bit more complicated, but become easier with practice.
The first of these spreads is the debit spread, also known as a bull call or bear put. Here, the trader is confident in the direction of the exchange rate, but wants to play it safer (with slightly less risk).
In the chart below, we see the 81.65 support level that appeared in the USD/JPY exchange rate in early March 2011.
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This is an ideal opportunity to place bull call spreads because the price level is likely to find some support and move higher. The implementation of the debit spread “bull call” will look something like this:
If the USD/JPY exchange rate exceeds 82.50, the trade will make a profit of 52 pips (100 pips – 48 pips (net debit) = 52 pips)
Premium through the spread while maintaining the direction of the trade. This strategy is sometimes called a bull put spread or a bear call.
With support at 81.65 and the bullish view of the US dollar against the Japanese yen, a trader can implement a bullish put strategy to capture any upside potential in the currency pair. Therefore, the trade will be broken down as follows:
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As anyone can see, this is a great strategy when a trader is set up for a bear market. The trader not only benefits from the option premium, but also avoids using real money to exercise it.
So what happens if a trader is neutral on the currency but expects a short-term change in volatility? Similar to comparable stock options, currency traders will build an options strategy. These are great trades for an FX portfolio to capture a potential breakout or soft pause in the exchange rate.
Straddles are slightly easier to set up compared to credit or debit spreads. In a streak, the trader knows that a breakout is imminent, but the direction is unclear. In this case, it is better to buy both calls and puts to capture the breakout.
USD/JPY volatility in February 2011 creates a perfect straddle opportunity. Image by Sabrina Jiang © 2020
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As seen above, USD/JPY fell just below 82.00 in February and remained in the 50 pips range for the next few sessions. Will the decline in the spot rate continue? Or is it consolidation before growth? Since we don’t know, the best option would be to apply a straddle like the one below:
It is very important that the strike price and expiration are the same. If they differ, it can increase the cost of the trade and reduce the likelihood of a profitable setup.
The profit potential is endless – similar to the vanilla version. The difference is that one of the options will expire worthless, while the other can be traded for a profit. In our example, the put option expires worthless (-45 pips), while our call option increases in value when the spot rate rises just below 83.50, giving us a net profit of 55 pips (a profit of 150 points – option premium of 95 points = 55 points).
Currency options are a great tool for trading and investing. In addition to using a simple call or put to hedge, an investor can also refer to speculative spread trades when determining the direction of the market. However you use them, currency options are another versatile tool for forex traders.
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A forex trading strategy defines the system a forex trader uses to determine when to buy or sell a currency pair. There are various forex strategies that traders can use, including technical analysis or fundamental analysis. A good forex trading strategy allows a trader to analyze the market and make trades with confidence using smart risk management techniques.
Forex strategies can be divided into a separate organizational structure that can help traders find the most suitable strategy. The diagram below shows how each strategy fits into the overall structure and relationship between forex strategies.
Trading the Forex market requires combining several factors to develop a trading strategy that works for you. There are countless strategies that can be followed, but it is important to understand the strategy and feel comfortable with it. Each trader has unique goals and resources that must be considered when choosing a suitable strategy.
To easily compare forex strategies by three criteria, we have laid them out in a bubble chart. On the vertical axis is the Risk-Reward Ratio, with strategies at the top of the graph having a higher reward for the risk taken on each trade. Position trading is usually the strategy with the highest risk-reward ratio. On the horizontal axis is time investment, which shows how much time is required to actively monitor trades. The strategy that requires the most time resources is scalp trading due to the high frequency of trades that are made on a regular basis.
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Price action trading involves studying historical prices to develop technical trading strategies. Price action can be used as a standalone method or in combination with an indicator. Basics are rarely used; however, the inclusion of economic events as a justifying factor is not uncommon. There are several other strategies that fall into the price action category as shown above.
Price action trading can be used over different time periods (long-term, medium-term and short-term). The ability to use multiple time frames for analysis makes price action trading appreciated by many traders.
Price action has range, trend, day, scalp, swing and positioning. These strategies follow different forms of trading requirements, which will be detailed below. Examples show different methods of trading them
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