Will the market price go up or will it go down? That is what we all want to know. What if it did not matter?
Directional trading
The majority of traders in any financial market are directional traders. Meaning they try to predict which way the market will move. Directional trading can cause many headaches such as
- It takes months to years of constant practice and training which can be very expensive and time consuming. In many cases this requires you to be in front of your computer the entire time your trades are in the market.
- You need to be aware of all the upcoming news announcements and be fluent with understanding several different market indicators.
- You must be disciplined and have high amounts of commitment and patience.
- Directional traders are frequently in and out of the market. In most cases, you will be in less than a day, hence the name day traders. This causes you to pay a lot of extra money in broker fees.
- Another disadvantage to directional trading is that you must be up at odd hours of the day when the market is moving at a fast pace. Plus, you must remember different trading strategies which may be very complicated.
- Finally, the most important factor is you must have high emotional control to make rational decisions rather than emotional decisions based on fear and greed. This has much more to do with your personality than your academic ability to learn.
It is said 95% of the people who trade directionally will lose.
Non-directional Trading
A trading method that is not dependent on which direction the market moves is known as non-directional trading or hedge trading. In the foreign currency market the method of non-directional trading would be buying currency pairs that move in opposite directions such as the EUR/USD and the USD/CHF. The gains on one trade will be offset by losses on the other. This allows the trader to stay in the market and substantially reduce their risk while they continually buy low and sell high small portions of their account.
Most Non-directional Trading strategies are much more automated than directional Trading strategies. So they require much less time to perform.
Since the trades are hedged there is no need to monitor your trades.
You can place pending limit trades for both possible market movements, so there is no need to worry about missing a trading opportunity.
Since it does not matter which way the market moves, pending order trades can be placed for both possibilities market movements, either up or down. This allows you to not have to continuously watch your trades.
Since you are not entirely getting out of the trades you are paying much less in broker fees. Also in the forex market you are entitled to earn interest on the leveraged amount of money you control in the market. Depending on the amount of money you keep in the market you can receive a substantial return on interest alone.
When using a structured method such as Non-directional trading it limits the possibility of making irrational decisions, and reduced the total amount of decisions that need to be made.
Best of all there is no need to read complicated charts or graphs.
Of course there are also disadvantages to Non-directional trading. A directional trader has the possibility of making a lot more money in much shorter amount of time; however, with the majority of beginning traders losing all the money in their accounts in only a few months a longer term Non-directional trading strategy is a very favorable alternative.
