Speculative Trading in Forex

Investing is putting money into low-risk assets that take months or years to come to fruition and bring positive results.

How speculative trading works

When a trader speculates, they try to make a profit from a price fluctuation, namely from the difference in price during the shift.

Speculators help to add liquidity and narrow the bid-ask spread, which makes it easier for others to enter and exit trades. As such, traders who are into short-selling can help keep markets from getting overheated by pushing back when prices get too high.

The key difference between a speculative trader and an investor is that the former keeps their position open for just a few minutes, hours, or days. They are not holding on to the asset for months or years. A speculative trader can often open and close dozens of trades just within one day.

Speculative traders often rely on technical analysis to make their assessments, and they also follow political and economic news and reports just as they come out. Fast reaction and resilience are useful assets in this type of trading.

Investors, on the other hand, use fundamental analysis for their trades, as they are interested in long-term benefits and profits. They might be willing to invest only in stable companies with substantial and continuous growth.

There are times, however, when the line between investor and speculator is less obvious. A good example is real estate. Buying a property to rent it out is usually considered an investment. But if you buy several condos with little money down just to sell them quickly for a profit, that’s more like speculation.

Forex speculation

There are different markets available for speculation through CFD: stocks, Forex, and commodities.

In Forex, speculation is associated with the constant fluctuations of currency exchange rates. Speculative traders try to take advantage of price changes between currencies. The constantly moving exchange rates and the market’s liquidity and volatility are known to attract traders.

Forex traders try to profit when one currency rises or falls against another. To do speculative trading right, traders need a good understanding of global economics and politics, as those factors directly affect currency prices. It’s also important to stay in the loop for news releases that might affect certain currencies or stocks.

A macroeconomic report that can influence the market.

The most popular assets (EURUSD, GBPUSD, XAUUSD, etc.) are in high demand with traders. These assets are often bought and sold in milliseconds. Some of these assets may reflect not only the economic situation in a country, but also in entire global industries.

Traders anticipate future price directions and act based on predictions rather than intrinsic value. For example, a trader may buy EURUSD expecting a rise after a “soft” Fed statement, due to the possible weakening of the US Dollar.

What are the risks of speculative trading?

When you trade as a speculator, you're taking on a real risk, and it's important to know that upfront. Speculative risk means you're making a trade while knowing there's a chance of either making a substantial profit or losing money. What sets it apart from unexpected risks that are out of your control is that it's a conscious decision.

For example, if you think an asset's price will go up, by entering the trade, you are taking a speculative risk, as you know it may drop instead. By contrast, if something completely unexpected happens, like a geopolitical crisis affecting oil prices, or a pandemic with shutdowns, that’s a non-speculative risk.

In CFD trading, big gains and big losses are equally possible. That’s why managing your risk carefully is a must.

How to do it right

To reduce speculative risk, traders use macroeconomic markers and graphical models to predict prices. The more liquid assets are, the better the chart, and the more accurate the predictions traders can make.

The best strategy for a spec trader is to find a liquid instrument, analyze its chart, assess the macroeconomic situation, make a forecast, and then decide whether to buy or sell the asset.

Summary

Forex speculation is a calculated strategy based on analysis, timing, and experience. While speculative trading involves risks, it also offers high potential for profit. By focusing on liquidity, macroeconomic indicators, and technical markers, traders can turn speculation into a structured, informed approach and navigate the fast-changing world of Forex with confidence.