If you are going to be trading on the forex market then you need to know what type of foreign exchange rates trader you are. Once when you know about the type of trader you are will you be able to effectively trade on the forex market. There are a few types of traders that are common while others are slightly rarer.
Technical Foreign Exchange Rates Trader
The first way of analysing the forex market is through technical analysis. The technical trader will use this analysis method alone or with small amount of fundamental analysis. These traders are the most versatile as they are able to trade in any timeframe. These traders will use charting tools to determine which way the market will turn and what it could do in long run. Technical trading is the most common type of trading because of the wide spread use of charts and technical analysis.
The Fundamental Trader
When you look into forex you may hear about fundamental analysis. The fundamental trader uses this type of analysis as their primary method of analysing the market. In forex these traders are more likely to complete long-term trades because of the long-term impacts of fundamental events. Of course, there are also some fundamental traders who look at short-term trading strategies like scalping. These very short-term trades are used directly after a high impact fundamental new release. When this is done you take advantage of the initial movement the news release causes to make a small profit. Most fundamental traders only consider this as a supplementary strategy because sufficient fluctuations do not occur regularly enough.
The Trend and Sentiment Traders
Sentiment traders are also commonly referred to as trend traders. As the name suggests, these traders will find a strong movement in the market and trade on the trend. These traders generally rely on technical analysis to identify the trends. When you do this kind of trading you need to know how strong a trend is and when it might turn. This is where the sentiment part of their name comes in. These traders will keep a close eye on the market sentiment and often employ herd instinct trading strategies.
These herd trading strategies are based on a fairly simple concept. When a large number of traders are trading in one direction you follow them. You can identify these movements with market sentiment indicators and the COT report. Of course, you have to be careful about trading with the crowd because the currency pair can move into oversold and overbought ranges. When this happens there are not enough traders left to drive the trend so it will either stabilise or fall. Trend traders need to have clear exit points so they are able to make the most of a trend.
An Arbitrage Trader
This is a type of trader that a lot of people do not know about. These traders will buy and sell a currency pair at the same time to make a profit. This is a very hard type of trading for a number of reasons. The first reason is that a lot of brokers will not allow you to buy and sell a currency pair at the same time. These traders generally have to work off more than one broker to achieve their profits.