The popularity of forex trading has increased dramatically over the past couple of years. Financial markets are now open twenty-four hours a day, five days a week (except weekends), offering traders substantial opportunities to profit from currency fluctuations. However, foreign exchange trading can be complicated, and traders need to find the best approach to suit their individual needs.
Forex strategies can generally be classified into two main categories: fundamental analysis and technical analysis. Fundamental analysis involves the study of economic data released by governments and central banks to forecast which currencies may move; whereas, technical analysis sees price movements as resulting from mass psychology. Singapore’s most popular forex strategies include hedging, arbitrage, trend following, carry trade, and scalping. Let’s explore each one of these further.
Hedging is essentially the simultaneous buying and selling of a currency pair to reduce the risk of adverse price movements. The natural approach for most traders would be to make trades in line with their forecast. However, this can be extremely risky as unexpected events may rapidly cause currencies to move against them. Therefore, hedging allows traders to enter into buy/sell positions that cancel out part or all of their initial exposure, thus minimising potential losses.
Arbitrage is the act of taking advantage of a difference in price between two or more different markets. It involves trading the same asset on two different exchanges simultaneously while considering factors such as commission fees, spreads, and any other transaction costs. Arbitrage opportunities are scarce in the foreign exchange market because assets must be identical; however, it is still possible to profit from differentials between similar instruments.
Trend following is a strategy that aims to profit by buying an asset that has recently risen in value and then selling when its value falls. The main focus of this trading method is to ride the wave of momentum, i.e., identify what will happen next based on what has occurred previously. Therefore, trend followers do not attempt to predict short-term price movements but only make directional bets.
Carry trade is essentially borrowing one currency with a low-interest rate and simultaneously investing funds in another currency delivering higher returns (interest rates). Carry trade aims to benefit from a positive “roll yield”, i.e., the net gain in interest rate payments between two currencies over a particular period. It’s one of Singapore’s most popular forex strategies because it allows investors to maintain exposure to high yielding currencies without actually buying them directly. Thus they can maintain flexibility and diversification.
Scalping is highly volatile trading pursued by many retail traders who attempt to profit by buying and selling within seconds or minutes at highly favourable prices with low risk. It involves making numerous trades during a single day but typically for relatively small amounts, ensuring low commissions fees. However, this trading style does not allow for long-term strategies, so it is not ideal for most investors.
The five most popular forex trading strategies in Singapore are hedging, arbitrage, trend following, carry trade, and scalping. Traders should choose a strategy that complements their individual needs rather than being attracted by the promise of high short-term returns. Deciding on a particular strategy is just one part of becoming a successful trader. There are many other factors to consider, such as order execution, transaction costs, transaction times etc. Fortunately, technology has advanced considerably, allowing retail traders to access professional-grade tools from anywhere globally, so it is possible now more than ever to find an approach that suits your needs.
Singapore’s competitive advantages as an international financial centre make it THE place to be for aspiring and professional traders alike! Head down to Saxo forex broker today and let them guide you through your first steps as a forex trader!