Definition – What does Directional Trading mean?
Directional trading refers to trading positions that are opened in order to profit from an upwards or downwards movement in a currency pair’s price action. Directional trading is often used to characterize a majority of forex trading. However, a pure reading of directional trading suggests that a directional trader opens positions before a trend (up or down) has been established or sustained.
ForexTerms explains Directional Trading
Directional trading is usually driven by a trading idea. For example, a directional trader believes the yen is overvalued compared to the dollar based on his or her analysis of fundamental and technical factors. The trader will then take up short positions on the yen and long positions on the dollar – either using the USD/JPY currency pair directly or through combination trades. If the yen’s value begins to drop against the dollar, then the trader will profit. Directional trading often relies on some fundamental analysis. This distinguishes it from trend trading, where the data can be purely technical and no judgement is made about the economies that issue a specific currency.