How does a professional forex trader trade in the forex markets?

The time that a professional forex trader spends on the trading floor is very important to them. Therefore, to save time and effort while trading, they usually innovate unique trading systems and trading strategies. They prefer to avoid using overly-complicated trading methods. They also tend to rely more on raw price data to make informed decisions.

So, how does a professional forex trader trade? Below are a few pointers that explain some common traits of professional forex traders.

Automated trading

Based on their knowledge, past trading experiences, and objectives, professional forex traders just like stock traders in the stock markets, create their own unique trading logic and depend upon it while trading in the markets.

Forex trading logic can be coded into software algorithms to create forex trading robots, which are nothing but automated software simulating a trader’s unique approach towards forex trading.

Typically, such robots scan the markets for current trades and gather important inputs by analyzing ongoing market trends. They generate useful results which can help traders to make sound trading decisions.

Professional forex trading can include making use of such automated software robots to help you save time and effort.

Trade using your “gut” feeling or do discretionary trading

Over a period of time, professional forex traders start developing a kind of sixth sense which helps them to anticipate the outcomes of a particular trade. It’s based upon their gut feeling. It is something they learn over time by making mistakes and by taking corrective actions to turn losses into profits.

Even though they might be using automated tools to aid them in trading, professional traders eventually depend upon their gut feeling while deciding whether or not to buy or sell currency pairs. This might also be in contradiction to what forex signals may state or suggest.

Unlike professional forex trading strategies, a person’s gut feeling is not limited to logic, and neither can it be taught to an individual desiring to learn how to become a professional forex trader. A trader acquires this virtue over time through his or her experiences.

Technical trading

Some professional forex traders like to predict the market by studying price charts and following the price patterns or movements of currency pairs. They use technical analysis to predict whether a particular trade shall be profitable or should be avoided.

Technical traders depend heavily on economic variables derived from price patterns or tech signals to place their forex trades. It is what gives them the upper edge in the market. They also closely follow professional forex charts to make the most of their trading insights.

Fundamental or news trading

It is a trading method which involves relying heavily on the market news to compile your trading analysis and predict the markets. News items and press releases tend to influence the markets positively or adversely. They’re also responsible for driving price movements.

However, forex markets can be strange in their behaviors and sometimes exhibit results that one has not anticipated. This can be because traders often speculate on how the markets are likely to respond based on the impact of the news, and start buying or selling currency pairs on the basis of their expectations.

Many professional forex traders also make use of professional forex charts and technical analysis in conjunction with news trading to check and verify the price movements of pairs and whether they support their predictions.

Day trading

Some professional forex traders prefer to trade abruptly, within very short periods of time. Rather than doing full-time trading, they typically buy or sell currencies several times a day, exiting and reentering the market each time. They do spontaneous trading based upon the tips or information they’ve received, or they wait for the “correct time” to trade when a particular currency pair is at its lowest or highest based upon their buying or selling decisions. This is day trading. Price action plays an important part while day trading.

Scalping

Comparable to day trading, scalping involves quick and frequent short-term trades, but with a subtle difference. While “scalping,” the trader jumps in and out of trades many times a day – to “extract” a few pips as and when opportunities present themselves. However, the frequency of exits and re-entries into the market is much higher compared to day trading.

This is not a recommended way of trading since professional forex traders often have to bypass the stop loss limits set for buying and selling currency pairs. Therefore, it can be a riskier way to trade.

Swing or position trading

The trader takes a short to a mid-term view of the market and will start trading for a few hours on certain days, or for several days, or even weeks at a time.

The focus is to buy and sell currency pairs whose technical indicators suggest either an upwards or downwards trend in the near future – Generally covering a single day and extending to two weeks or so.

Swing traders typically do two to ten trades per month on average.

Range trading

In a range-bound market, the price of the currency pair bounces between a specific high price and a low price. The high price in forex trading is known as a resistance price, functioning as a barrier. The currency pair often can’t cross that price at that instance of time when considering the prevailing market conditions.

Likewise, the low price, also known as the support price, is the price that the pair won’t go below.

Range trading involves trading between the support and resistance prices to generate profits. Traders closely study the trading signals prevalent at both ends and opt for trading when both the prices reach their most lucrative trading levels.

Trend trading

In a trending market, at times, the currency pair price can start moving in one direction. While trend trading, forex traders usually pick currencies using the dollar because a dollar-pair combination tends to be more liquid.

You can have either an upward trend (uptrend), or a downward trend (downtrend). An uptrend exhibits a higher difference between buying and selling prices i.e. the selling price – the higher price – will keep on fluctuating at very high levels whereas the buying price – the lower price – varies at very low levels. The difference between the respective prices is significant and persists for longer durations.

On the contrary, a downtrend suggests a low difference between the selling and buying prices.

Traders try to capitalize and make a profit by identifying the correct instance of time when the selling price is at its peak (while selling) or it is at its lowest (while buying). They can’t afford to lose such an opportunity since it might take a lot of time to come across another one.

Counter-trend trading

Even though the counter-trend trading strategy can be used at any time, forex traders – the more experienced ones – prefer to implement it when they see strong trading potential when the trends undergo a reversal. In many ways, it is similar to swing trading. Traders try to make instant profits when the trends show an anomaly in its price movement.

However, a lot of experience is required in correctly identifying an anomaly. Traders have to be certain about false tops or bottoms in trends before genuine ones actually emerge.

Carry trading

Popularly known as “the carry trade,” it is the strategy of buying a high interest-rate currency against a lower one and holding the pair for a long period of time, before selling it at a high price.

Generally, forex brokers pay the difference in interest rates to traders for each day the currency pair is “held.”

The idea here is higher-yielding currencies are prone to large sell-offs and the currency pairs are generally considered riskier compared to safe-haven currencies such as the U.S. dollar or the Japanese yen. With a stop loss limit to lock your profits, carry trading can be a reliable way to make a good profit if you have patience.