The Long And The Short Of Forex Trading Strategies

Written by asingleton on Wed, 10 Feb 2010 12:57:19 GMT

Anyone who is a forex trader is sure to tell you that they spent plenty of time weighing up and choosing their strategies. If you’re thinking of entering the world of Forex trading, it is a good idea to make sure that you are familiar with basic Options trading strategies to ensure that you move forward with the one that is best suited to your projections.



One of the main considerations when selecting your trading strategy is your currency view; i.e. the direction you believe that a particular currency will move in the future and the timeframe thereof. Depending upon whether the trader sees the market rising or falling, these views are often expressed as either Bullish or Bearish respectively. Another important factor is perceptions of volatility; i.e. the extent to which the trader anticipates fluctuations in the chosen currency. Basic options trading strategies differ, with each offering unique benefits. As such, it is worth bearing in mind that different strategies will often become necessary for different trades.



A Long Call strategy is adopted by those seeking to make a return on an increasing trend in the spot market. Despite the name, the trend does not have to be conducted in the long term; the trend could equally unfold over the short term. If you choose a Long Call, you’ll have the chance of gaining potentially unlimited profits, however the premium paid for the Option will be lost if the options have no value at the point of expiry. On the other hand, a Short Call Option is often employed by traders who anticipate minor changes in the spot. This is a useful strategy for those who consider an option to be priced too highly, or for those who believe that an Option could increase beyond market expectations.



A Long Straddle is an Option employed by those expecting large, but unpredictable movements in spot price. In such a scenario, the trader could buy a Put and a Call with the same Strike Price. This will enable the trader to make a potential profit whilst limiting risk exposure to the cost of the Premiums. Meanwhile, a Call Spread is an Option employed when the trader anticipates a moderate increase in the Spot. It should be noted that this strategy will result in a profit ceiling.



A Long Strangle is an Option employed by those traders whose forecasts illustrate a large increase or decrease in the Spot. Risk is limited to the cost of the Premium. This strategy will yield a payment if the Spot is below 1.1466 or above 1.2034 at the time of expiry. Conversely, the Short Strangle is a popular choice for dormant markets and is employed when the trader anticipates that a currency will trade within specific parameters. The profit can range to the Premium of the two sold options but the risk is unlimited is the option expires in the money.



To be successful at forex trading, some research into all of the trading Options available is essential.



This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.



Adam Singleton writes for a digital marketing agency. This article has been commissioned by a client of said agency. This article is not designed to promote, but should be considered professional content.


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