If you want to trade forex, part of you may be stoked at the prospect of entering into the dynamic world of active trading. Buying and selling currency pairs quick fire to make a profit is what makes investing attractive. However, day trading and high-volume trading may seem attractive, but it’s also labour intensive; as well as keeping abreast of your trades and buying and selling, it’s also necessary to be aware of factors affecting the market. For this reason, it’s important to know the difference between active and passive trading.
If you have the knowledge and available time to trade actively, it may well be for you. Active trading allows you to identify currency pairs that are outperforming the market or those that have good upside potential. For active traders, the object is to ‘beat the market’ and make higher than average returns over successive trades. The advantages here are that investors can exit a currency pair quickly if the risks become too high, and they can react quickly to positive factors that may affect a pair.
On the other hand, trading often incurs fees per transaction. The more you trade, the more costs you incur. If you compare this to a currency pair left over the long-term, the fees can often negate any profit made if compared to the market average.
Passive trading involves a long-term approach; this involves fewer transactions that allow currency pairs to move through their natural cycles to make a profit. It’s possible to buy a pair when the base currency is high and sell when it’s low without specialist knowledge. This approach reduces the cost of transaction fees and allows diversification across the portfolio. Only skilled traders beat the market, so taking advantage of natural cycles may be a better approach.
However, there are disadvantages to this approach: it takes time to reap the rewards, and it’s less flexible. If information comes to light that affects currency pairs, such as the recent outbreak of the coronavirus and its effect on USD/CNY pair, failure to act can lead to heavy losses on an existing position or a missed opportunity.
By far the most significant factor is the fact that in forex, profits over the overall market will always equal zero. This means that there will always be an element of market timing for forex trades, as they have less of a potential to climb indefinitely, unlike stock indices and stocks.
However, if you’re interested in passive forex trading, there are platforms that can help. There’s a bot at www.celestialtt.com that replicates the positions of successful forex traders to allow less experienced investors to benefit from their skills.
Other platforms, such as IG, allow traders to take advantage of global events while hedging their bets, with tools that allow investors to trade major, minor and exotic currency pairs separately. This platform also allows trading of different currencies against a specific base currency or currencies to replicate passive trading against an index.