When starting in forex, you may be overwhelmed by the information on what it means to be an investor. A common mistake that many beginners make is the duplication of strategies from other investors. What works for one trader may not necessarily work for you. Some traders begin as positional traders or day traders without understanding the possible implications, and others go straight to long-term investing.
Today we shall be discussing short-term and long-term investing strategies in forex. Hopefully, you will be more equipped to make informed decisions in the future:
As the name suggests, short-term trading involves holding positions over a short time. Short-term, in this case, means holding a position for no longer than a day. Sometimes it may take you a little over a day to reach your target.
For short-term investment in the forex market, you may have to rely heavily on both fundamental analysis and technical analysis.
- Technical Analysis: Involves evaluating an asset by analyzing price history and candlestick patterns. Technical analysis involves the use of charting tools.
- Fundamental Analysis: Involves predicting price movements based on news feeds and events. Stories affecting employment, GDP, economy, and interest rates are bound to affect the fates of specific assets.
Familiarizing yourself with fundamental and technical analysis is essential to both long-term and short-term forex strategies. Is there a superior short-term forex strategy? There is no definite answer to this question. However, the most commonly used strategy is scalping.
1- The Scalping System
The scalping system is taxing in terms of time and concentration. You will have to spend a lot of time in front of a screen analyzing the charts. Scalping needs a full-time trader. Scalping involves taking advantage of small movements in the charts to make profits. A scalper will open anywhere from ten to hundreds of positions within a single day.
Scalpers trade on the one-minute or five-minute charts. These traders will close a position a soon as they make a few pips. Given enough time and volume, these profits add up.
Scalping is about being in the right place at the right time. You need to keep an eye out for news events and adjust accordingly.
2- The Day Trading System
The day trading strategy is similar to the scalping strategy except for the fact that the trader holds a position for longer. Instead of holding a position for a few seconds or minutes, the day trader holds his positions for a few minutes or hours. Usually, a day trader is done and dusted by the time the market closes for the day.
Success in Short-Term Systems
Success will depend on factors like volume and leverage. Speed is also an essential factor. You want currency pairs with high volatility. Spreads are a significant impediment to profits. As a short-term trader, you need to consider the spreads before opening a position.
The idea behind long-term trading is to execute fewer transactions. Traders that long-term harness trading usually targets 200 or more pips. Unlike short-term trading where the trader holds a position for short periods in a day, long-term trades can last weeks, months, or years.
Positional trading embodies how you can trade forex assets for the long-term. It involves the identification of a trend and following it for weeks or months. Traders can hold a position for over a year. In long-term trading, traders buy on expectations and sell on facts. An example of such a trade is the George Soros trade of 1992.
In this trade, George Soros and his team were skeptical about the U.K’s ability to maintain fixed rates. As a result of the trade, the country pulled the pound from the ERM in September that year. The trade generated over £1 billion
Long-Term Trading Best Practices
1- Use Small Leverage Levels
Stick to volumes that use small percentages of your margin. The major consideration is your ability to sustain any intra-day or intra-week volatility.
2- Pay Attention to Swaps
Trading forex long-term can generate handsome revenues; you should pay emphasis on profit. A swap is a fee of holding a position overnight. Swaps can be positive, but in most cases, they are negative. Evaluating the expenses is crucial to making a profit.
Choosing the Right Strategy for You
Choosing the right strategy that works for you depends entirely on your objectives and your capacity to trade. Short-term strategies like scalping require a lot of time and alertness. You will also have to keep an eye on for the new when employing intra-day strategies. Day trading presents the best opportunity to learn the ropes as you find your way through trading.
Long-term strategies are rewarding, but they require a lot of capital and patience. You need to keep up with a trend and wait for the best opportunity to sell. You must also follow the news and know how to react when certain events take place.
It all depends on you. To learn more about forex trading strategies here are some articles that may interest you.