Forex traders can broadly be classified into two types: long term and short-term traders.
While trading style depends on a trader’s personality type and risk appetite, most forex traders usually prefer and apply short term trading strategies in the market.
In light of this, and the damning statistic that less than 20% of traders achieve success in the market, could traders be missing out consistent profitability by shunning long term forex trading strategies?
Technical analysis involves forecasting future price action based on past market price data.
Technical analysts achieve this by aid of price charts and technical indicators, such as moving averages.
Markets are fractal by nature; which basically means that the quality of technical setups is independent of timeframe.
Short term technical analysts will target 10-30 pips, while their long-term counterparts will target anything from 100-300 pips. This will also impact their stop-losses and profit targets placements.
The inherent volatility in the forex market therefore hinders successful stop-loss placement in short term trading strategies.
This is not the case with long term strategies, as the wider stop losses give trades sufficient ‘breathing space’ to allow price action to take course.
As for take-profits, short targets are logically easily attainable than long targets. But as a short-term trader, the threat is the stop loss can be hit first.
Fundamental analysis in forex involves the study of underlying economic, social and political factors that impact the supply and demand of various currency pairs.
For long term traders, fundamental analysis would involve studying broader macroeconomic factors, such as interest rates, global commodity prices, and various other geopolitical factors.
This helps establish long term trends of various currency pairs, after which traders can pick out optimal entry points to ride out the big movements in the market.
For short term traders, fundamental analysis is somewhat very simplistic and generally involves trading the news. Economic news remains the single most important catalyst of big intraday price movements.
To take advantage of this, short term traders utilize the economic calendar tool to track news releases that might have an impact on the price action of their favorite currency pairs.
Traders use the economic calendar tool to trade actual news releases against the market expectation.
For short term retail traders, this presents significant challenges as markets are usually choppy around the time of news releases and there is a likelihood of slippages as well as high spread on underlying currency pairs.
Trading Costs and Management
The major trading costs in forex are spreads. This is the cost of opening any trade in the market. This particularly affects short term traders who open multiple trades during the day.
With small profit targets as well, spreads could eat into short term traders’ profitability. For long term traders, spreads are almost negligent as they incur the cost only once for trades that run for a long period of time.
Admittedly, long term trades can also attract other costs, such as rollover and swap, but these are minimal and can sometimes be in the positive.
Online forex trading is just not about entering and exiting trades; managing opening positions can determine traders’ overall profitability.
For short term traders, trade management is fundamentally unfeasible due to short stop losses and take-profits as well as high volatility.
For long term traders, there is sufficient flexibility to manage open positions.
Long term traders can adjust their trades to react to new economic data releases, new technical setups as well as to new opportunities.
There is sufficient space to add to positions that are doing well so as to maximize profitability; as well as to cut or reduce overall exposure to trades so as to limit trading risks.
No matter the strategy, trading psychology is vital to success in the forex market.
Real money is on the line when trading in the forex market, so naturally, human emotions are bound to come into play.
A profitable trading strategy (short term or long term) can easily be undone by a trader’s emotions.
Emotions range from fear and greed to overconfidence and trading bias. Such emotions can lead to various trading pitfalls such as overtrading, Gambler’s fallacy and other trading mistakes.
Because short term traders place multiple trades and spend long hours on their trading screens daily, psychological pressures may take a toll on them making them vulnerable to making trading mistakes that would otherwise be avoidable.
For long term traders, there are still emotions, but they are not as pronounced. Long term traders open only few trades, which means fewer emotions; and they also spend more time analyzing their trades, so they are likely to be more objective in making trading decisions in the market.
Overall, forex is not designed for any one particular strategy (long term or short term); it is simply just a market.
Any timeframe or strategy depends on the personality of the trader, but the consensus is that long term strategies give traders peace of mind and promote objective trading activity.