What Is Forex Trading? It has the power to allow your money to stay in place for a certain period of time. But that doesn’t mean the reverse is any less powerful. Both short-term and long-term trading in Forex has its advantages and disadvantages. How to maximize profit and minimize risk depends on how well you understand the market and yourself.
But let’s eliminate the big question. Which is better: short-term or long-term Forex trading? There’s no definitive answer. Because a long position in Forex has a greater winning ratio and profitability, but a short position has a greater compounding effect.
What is certain is that there is a specific trading strategy that fits the risk appetite and personality type of a particular investor. You can choose short-term trading instead of long-term trading, or vice versa.
Basically, it is very important for you to learn how forex transactions are applied.
What Is Forex Trading?
Although Forex markets are considered mixed, there are basically 2 different types of transactions. These are short-term and long-term transactions. These two types of transactions go into divisions within themselves. We will examine it with pros and cons.
What Are Short-Term Forex Trading?
This is when you buy currencies and hold them for a few minutes or less than seven days. Many brokers market such strategies as lucrative and sell them to investors in the most attractive way possible. There is an underlying reason for this, and it may not necessarily work in your favor.
Advantages Of Short-Term Transactions
- Making a profit is fast
This is because a trade can only be carried out in hours or days. You can profit from the positions you open and close in a day.
- Greater earning potential
You have many opportunities to capture every fluctuation at times when changes in exchange rates are highly volatile. You can even win in side markets.
- Risk in your capital is minimized
Once you realise you’ve made the wrong move, you can close a position and then release your capital to reinvest in new currencies, and hopefully for a more profitable trade. Your collateral capital is also locked only for a short period of time.
Moreover, most of the technical and fundamental signals in Forex are more suitable for short-term trading. A trading opportunity can now be assessed in less than a few hours.
Risks Of Short-Term Transactions
- High trading costs
The more often you trade, the more Commission you have to pay. These can easily be collected, resulting in very little or zero percentage gain. Now you know why brokers trade more short-term than long-term.
- Significant losses
One reason for this is fluctuations in the markets. Another is the use of margins that day-to-day investors usually use when trading in the short term. Collateral calls can mean higher returns, but they also increase the risk and size of a loss.
- Increased stress levels
This is due to the unpredictability of the market. You’re also up against professionals who might be more knowledgeable than you are in a zero-sum game.
- Requires more time
When the time interval between buying and selling is short, you need to stay constantly connected to your screen, monitoring tables, technical indicators and other factors that may affect currency movements. Otherwise, you may miss out on a profitable trade.
Who Are Short-Term Forex Trading For?
This refers to investors who engage in fast-paced trading, holding positions for between a few minutes and a few days. The goal is to profit from small caterpillars as often as possible and monitor their collection. You will find the most active scalp during the busiest hours of the day.
As the name suggests, these investors are holding positions during the day. At the end of the day, they close their transactions, even if they result in a profit or loss. For this person, there is no buying and waiting overnight.
Which Markets Are Good For Short-Term Investors?
Apart from Forex, there are other markets that are suitable for short-term trading that you can explore.
Stocks-shares on the Stock Exchange can be bought and sold both long-term and short-term. However, you can choose to close trading hours after a few hours or at the end of each day, or for that intraday gain or loss.
Indices-short-term trading of indices follows a pattern similar to stock / stock trading, but involves speculating on different company shares rather than individual stocks. This exposes you to a much larger market, but also more factors that can affect your position.
Cryptocurrencies-with the market open 24/7, along with the volatility of cryptocurrencies, there are many opportunities for short-term investors to make a profit.
Commodities-trading commodities such as gold, silver or oil offers the option to view traded assets on a shorter-term basis. Since you will decide on a specific time frame, you can always choose to go short.
The Most Effective Short-Term Forex Strategies
- Support and resistance
This is where you trade based on a break from key levels in the chart. You must first determine support and resistance levels in a higher time frame, and then move to lower time frames. Go short if price movement breaks down a support level.
- Trend Trading
This strategy recommends waiting for a currency pair to bounce off the same trend line a third time before opening a trade. When price movement breaks the trend, close a trade. From there, you can look for another opportunity to open a trade. Be sure to set a stop loss order to minimize your exposure to risk.
- Candlestick Formations
This includes scaling according to candle patterns such as Triangle, Inner Bar, Pennant and flag. You enter the market according to the direction shown by the candlestick formation. Similar to Trend trading, a stop-loss order is a must.
What Are Long-Term Forex Trading?
This involves waiting weeks or months to make a profit. Think of it as trading currencies with a bigger picture in mind. You’re not in it for pennies, you’re not in it for bigger profits. Because after a long wait, your long-term position can give you more profit than the sum of hundreds of small positions.
Advantages Of Long-Term Forex Trading
- Saves you time
You take one pair at a time and then hold it for a long time. You’re basically in and out of the market in minutes or hours. And you don’t have to look for new opportunities every day.
- Less stressful
This is because you don’t need to constantly monitor the market or charts. Between buying and selling, you can do a thorough search before your next trading decision.
- More profitable opportunities
Since you don’t need to cash in quickly, you can stick to the winners and get as much of them as possible. And because you don’t have to sit at your computer every day, you can both work and trade a full-time job at the same time.
- Better cost-to-profit ratio
Because you don’t open multiple transactions, you pay lower commission, and the cost of this can become negligible in the long run. Other costs, such as swaps and takeovers, tend to be minimal and are positive in some cases.
- Easy trade adjustment
When new economic data comes out, you can adjust your transactions to respond positively to it.
Losses Of Long-Term Forex Trading
- Not for the impatient
Liquidating a position can take weeks or months.
- Fundamental analysis requires knowledge.
This can be a disadvantage if you are just starting out
- Requires research
You can’t make trade decisions based solely on economic news. You should consider global commodity prices, interest rates, long-term trends of various currency pairs and other factors that will affect your position.
Then there’s the nagging feeling that you might miss because you’ve lasted too long. If you can’t prevent it, your stress levels will probably increase.
Who Are Long-Term Forex Trading For?
It holds positions for several days or weeks in the hope that a trend or model will change direction. They then profit from price fluctuations. Using technical analysis tools, a swing investor identifies a possible trend that will be held over a certain period of time.
Nothing beats a position investor in a waiting game. They can wait days or even years to close a position. Because the goal is to take advantage of long-term opportunities, they use fundamental and technical analysis to identify profitable transactions.
Which Markets Are Good For Long-Term Investors?
Growth stocks-stocks mostly taken from technology companies that promise high growth and high return on investment.
Equity funds-an ETF or mutual fund allows you to invest in the long term and profit from a wide variety of funds.
Bond funds-this is similar to equity funds, but includes a large number of bonds from various issuers. They are considered relatively stable and safe.
Dividend stocks-get regular cash payments from shares of more mature companies or companies that need less cash.
Real estate – the longer you hold an asset, the higher the return on investment. You can also use it as collateral and borrow money for most of the investment.
The Most Effective Long-Term Forex Strategies
- Trend trading
This includes searching for a new high or low that breaks at least three pips from an old resistance, and then opening a trade from there. Trading by trends requires you to learn how to spot (not predict) trends in order to profit from forex.
- Swing trading
This is where you enter a long – term trade based on three indicators-the moving average, the Relative Strength Index (RSI) and visual analysis.
- Breakout approval
This involves placing several momentum indicators – RSI and Stochastic motion – to help you analyze whether a trend is going to happen.