Trading foreign currency has become a popular side hustle to generate part-time income. The global market for currency exchange offers lucrative investment potential, but prospective traders still need to understand the fundamentals to make the most of their predictions.
The foreign exchange market – or forex market – is a multi-trillion dollar, decentralized exchange where hundreds of thousands of transactions are processed daily worldwide.
Part-time traders aim to make a profit from fluctuations in currency exchange rates. You must have the right tools and knowledge to make informed decisions and give yourself the best chance of success.
Here are some key facts to jumpstart your knowledge about forex trading.
Four Main Trading Sessions
Although the foreign currency market is open 24 hours a day, five days a week, there are four main trading sessions where the vast majority of trade takes place.
The four main trading sessions are Sydney, Tokyo, New York, and London. These markets overlap with each other at specific times throughout the day. The Sydney session is the first to open and runs from 5 pm EST to 2 am EST.
Tokyo’s session opens at 7 pm EST, while London opens at 3 am EST and closes at 12 pm EST. London is the most active session and has the highest liquidity, mainly because it overlaps with both the Asian and US sessions.
The New York session opens at 8 am EST and closes at 5 pm EST. It’s also highly active and has the highest volatility, primarily because it’s the last market to close at the end of the day, which means that it’s the last opportunity to make trades before the next business day.
Four Main Trading Styles
There are all kinds of ways to make money with forex trading. But most traders use one of the following four primary trading styles. Each style benefits a certain personality type, so let’s explore the nuances between them in greater detail.
Scalping is for traders who prefer short-term trades. A scalper holds positions for a few minutes at most, attempting to make the most of quick trades with smaller gains. The mentality is that every little bit counts, and the results stack up at the end of the day.
Scalpers will often use technical analysis to inform their decisions. Indicators such as moving averages, Bollinger Bands, or the relative strength index (RSI) help them identify potential entry and exit points. Scalpers need to be quick to enter and exit trades, which can be challenging in a fast-moving market.
2. Day trading
Day trades enter and exit trades within the same trading day. Like scalpers, they tend to use technical analysis to identify trends and patterns, but they trade on higher time frames such as 15-minute, 30-minute, and one-hour charts.
Day traders can capture larger price movements than scalpers, as they hold their trades for longer periods. However, because trades are held for longer than scalping, day traders need to be able to stay focused and monitor their trades throughout the day.
3. Swing trading
The goal of swing trading is to capture medium-term price movements, typically lasting from several days to several weeks. Swing traders use both technical and fundamental analysis, looking at various metrics such as trends, key support and resistance levels, and news events.
Swing traders attempt to capitalize on larger profits. They need to be able to withstand short-term price fluctuations and volatility. They also need a solid understanding of risk management, as holding positions for longer can increase the risk of losses.
4. Position trading
Unlike day trading, scalping, or swing trading, position traders aim to capture large, long-term price movements that can last for several months or even years. It requires less time and attention than other trading strategies but far more discipline and patience.
Position traders can afford to be patient, holding their positions for extended periods without the need to constantly monitor the market. This makes position trading a good choice for traders who don’t have the time or resources to devote to more active trading strategies.
Choosing Your Trading Style and Schedule
Whether you prefer day trading, scalping, swing trading, or position trading, it’s important to approach the market with a clear plan, a solid understanding of market fundamentals, and the discipline to stick to your strategy over the long term. By doing so, you boost your odds of becoming a successful part-time trader and achieving your financial goals.
Planning your trades also is crucial to a part-time trader. Finding the best trading times requires a bit of flexibility if you want to make the most of your investments. Therefore, you have to consider time zones, how your geographical location influences your ability to trade, and the most effective trading style for you.
But a schedule is only as good as its flexibility, so you have to be adaptable in a market that can be highly volatile. Identify the best times to trade based on the sessions that align with your schedule, but remember that some sessions may be more suitable for your trading style than others.
Ultimately, by understanding the basics of the forex trading world, choosing the right trading strategy, and implementing sound risk management practices, you can increase your chances of success in the market.