What is non-directional Forex trading? Before we jump into an explanation of non-directional Forex trading let’s discuss how Forex trades are typically made. Traders typically place trades based upon a direction that they believe the market will go. Bullish traders buy a particular currency pair and bearish traders sell a particular currency pair. Each of these traders hopes that the market will go in their particular direction in order that they may profit.
In non-directional Forex trading the trader does not select a direction. A non-directional trader is essentially neither bullish nor bearish.
So how do you make money trading Forex in a non-directional fashion? There are a number of ways to do this, but one of the most common is using Forex correlation as well as Forex options.
By using Forex options a trader may buy both a put and call. When a trader buys both a put and a call option they typically do so in periods of low market volatility. These Forex option traders don’t just look for periods of low market volatility, but periods of unusually low market volatility. They hope that by buying both put and call options during these market periods that they will make money as the market volatility returns to normal. The theory behind this is that as the market volatility expands one of either of the two options will gain value faster than the other option loses value, thereby producing a profit for the Forex trader.
A similar technique can be used by trading two different Forex currency pairs. It is important, of course, to understand the relationship between the two currency pairs you plan to trade prior to trading them. Non-directional Forex traders can buy one currency pair and sell another currency pair. Some traders actually treat the entire non-directional trade as a “synthetic security”. This simply means that the two currency pairs are viewed and traded as one security. In non-directional Forex trading traders will track the movement of their synthetic security and can exit the trade at any time based upon their predetermined level of profit or loss.
Non-directional Forex trading is a technique that may be a little difficult to wrap your head around initially. One thing to keep in mind for certain is that you are trading to a more currency pairs or options for each trade. This quite naturally means that there will be an increase in your transaction costs. This is not nearly as great a concern for those who are looking for larger profits in the hundreds or thousands of tips, but it is most certainly an important consideration for day traders and scalpers.
If you wish to get involved in non-directional trading using currency pairs rather than options, studying the relationships between the various Forex currency pairs can pay huge dividends in the long run.
