Long-term or Short-term forex trading?
The one thing every trader has in common is that they are constantly looking for a reliable trading strategy or at least for new ways they can adjust their strategy in order to increase its efficiency. However, there are different ways to approach forex trading and it’s important to decide from the beginning what type of trader you are aiming to become. If trading forex was as simple as following a flow diagram, the first fork in the road would likely be: are you a short-term trader willing to spend most of the time looking at charts hunting the next win, or do you prefer going with a more calculated long-term approach?
It’s good to note that both tactics have been proven to be profitable but that, of course, may have more to say about the individual trader and his skills rather than the trading strategy itself. All things being equal, an experienced trader is likely to achieve much better results than a beginner even if they follow the same pair and apply the same indicators to mark their entries and time their exits.
Typically, a short-term forex trader is considered someone who doesn’t hold positions longer than a couple of hours at a time but there are those who swing-trade and may hold them for a few days instead. Those who open longer-term positions will also use higher timeframes on the chart in contrast with the short-term traders who only look at the sub-hourly timeframes with just a quick glance on the daily to confirm their assessment.
The majority of short-term traders favor a strategy which is referred to as scalping and focuses on making consecutive small-target trades. Even though this strategy may be one of the most popular ones due to seemingly being the simplest one and also the one that satisfies the instant gratification need the most as it aims for multiple daily wins.
The main setback in a scalping strategy, aside from the time requirement, is the cost. When you trade forex, the cost of each trade comes in the form of spreads and as such the more you trade, you will accumulate higher costs. This is why scalpers mainly trade the major currency pairs like the EUR/USD and GBP/USD where liquidity and trading volume keep the spreads as thin as possible.
Also, volatility plays a very important role in short-term forex trading strategies and can sometimes be the reason your stop-loss was hit even though your initial assessment was in fact correct. If you are focusing on shorter timeframes like the 15m or the hourly, it becomes much harder to look at the big picture, which may cause you to place your stop-losses a little tighter than you should. The market may indeed start moving in your trade’s direction, but some volatility could reel the price back, hitting your stop-loss and bringing your trade to an immature end – a quite common occurrence. Planning your exits around key support and resistance levels is not a bad idea, as long as you leave some wiggle room for the price to maneuver.
The traders who opt for longer trades, often find themselves with a more relaxed approach since they don’t have to stress over the charts. Their forex trading strategy involves an analysis of the overall market sentiment and its direction over a long period of time. Riding a trend that gains momentum over several days can accrue a significant amount of profits and it’s a much less stressful approach to trading forex or any other instrument for that matter. It could even be argued that long-term traders are more successful than short-term traders which aren’t hard to believe if we consider that the main goal for a short-term trader is just getting rich as quickly as possible and end up falling victims of their own greed.
Also, holding positions longer than a few days can be a good or a bad thing since you may be liable to receive or pay some additional fees called swaps which are the interest paid to your broker or by your broker to you according to the rate of the currency pairs you are trading overnight. You should note that during the weekend when the markets are closed, you are still liable to the going swap rate.
While you may think, however, that long-term trading is as simple as a set and forget – it’s a little more nuanced than that. Long-term traders don’t just open a position and set their profit target near the predicted market top and call it a night. Think of it as giving yourself more leeway to manage a position over time either by adding to it, modifying your profit targets and exit timing. In general, you have more flexibility and time to adjust your risk management on the fly according to the current market landscape.
Wrapping up, it’s evident that both approaches have their unique benefits and drawbacks but even though it’s important to be able to distinguish between the two in order to decide which best fits your trading style – there’s no rule that stops you from integrating a mix of both in your trading strategy. Use CM Trading's demo account and try out which method best works for you and go from there.