Forex Strategies

FOREX TRADING STRATEGIES

Buying (Going Long) to Profit from an Expected Price Increase

Definition - Someone expecting the price of a particular commodity to increase over a given period of time can seek to profit by buying futures con-tracts. If correct in forecasting the direction and timing of the price change, the futures contract can be sold later for the higher price, thereby yielding a profit.1 If the price declines rather than increases, the trade will result in a loss. sasaa

Strategies - Long hedging, long straddle, long put

Selling (Going Short) to Profit from an Expected Price Decrease

Definition - The only way going short to profit from an expected price decrease differs from going long to profit from an expected price increase is the sequence of the trades. Instead of first buying a futures contract, you first sell a futures contract. If, as you expect, the price does decline, a profit can be realized by later purchasing an offsetting futures contract at the lower price.

Strategies - Speculation, hedging, arbitrage, against the box

Risks

- when you short sell, your losses can be infinite

- Shorting stocks involves using borrowed money, otherwise known as margin trading. Just as when you go long on margin, it's easy for losses to get out of hand because you must meet the minimum maintenance requirement of 25%. If your account slips below this, you'll be subject to a margin call and you'll be forced to put in more cash or liquidate your position.

- If a stock starts to rise and a large number of short sellers try to cover their positions at the same time, it can quickly drive up the price even more. This phenomenon is known as a short squeeze.

- largest complication is being right too soon. Even though a company is overvalued, it could conceivably take a while to come back down. In the meantime, you are vulnerable to interest, margin calls, and being called away.

Spreads...