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A successful trader is one who finds a currency trading strategy that is successful. Your strategy may be to hedge around eliminating the risk factor, a strategy to earn you a quick profit or speculation on the movement of the price. Based on the kind of strategy used, a trader is classified into three categories as discussed in detail below.
Hedgers
These types of traders are basically averse to taking risks. They invest safely and prefer to protect what they have and their position rather than aim for large profits. The strategy used by hedgers is by analyzing the risk in the position, and the implications of taking the risk. After analyzing, the hedger will decide how much risk he is willing to take. As no trade is risk-free, he will choose the option that is least risky and finally strategize and implement it.
If this type of trader has an office in US and Japan, he will overcome a situation in which the Yen is expected to weaken by making a short position on it. This will earn them a profit on the weakening and offset the loss.
Speculators
These types of investors are exactly opposite to hedgers. The position they take depends is uncertain and is on the basis of the prediction made about the expected price of the currency. They are willing to take risks to make a quick profit.
The benefit in speculating depends on what has been predicted for the currency and if the price is expected to fall too much. For example, if the trader is trading with USD, then he will short it when it is expected to fall and hope that the prediction is correct. When the prediction proves correct, he earns a profit.
Arbitrageurs
These third types of traders develop a risk free strategy by using opportunities presented to them due to price inefficiencies. As prince inefficiencies are very time sensitive, it is essential to take advantage of them quickly, lest the opportunity is lost.
Arbitrage trading involves trading using two different types of currency pairs. For examples, exchanges rates for EUR/USD in New York is 0.6522 and the rates for the same currency pair in London is 0.6524. The trader can buy 6522 Euros with $10,000 in New York and can short 6524 in London with an extra $1000, earning 4 risk free pips.
Conclusion
Knowing what type of forex trader you are and the strategy you will take is a very important part of currency trading. Choosing and implementing your style will help you to focus on a particular type of indicators and help to define your strategy. But the bottom line is in understanding all these strategies and making the best use of your knowledge.
