An introduction to long-term Forex trading strategies
There are two types of traders, day traders and position traders. The first type is more common; they prefer short-term trading and small but regular profits. There are also those who prefer long-term Forex trading. Longer positions and bigger profits are what lures this type of market players into their trading mode of choice.
In the current article, we'll focus on long-term currency trading, provide its general characteristics, and overview the trading strategies that can be helpful in trading long-term.
Let us start with the basics and see what position trading is all about.
So, what is long-term Forex trading?
It's all very simple: if your positions last for a significant number of days (usually more than a week), you are a positional trader. While short-term traders normally make profit of 5-9 pips per trade, they can expect for 200 pips when trading Forex long-term. Holding your positions for longer periods of time does not mean that you need to sit and watch the price all the time.
The trick is to set up your strategy in such a way that your gains and losses are under control and/or fit into your budget. The main shortcoming of this trading style is the lack of flexibility which day currency traders have. Instead, there is more experience, knowledge, and planning required.
Unlike short-term traders who base their price expectations on technical analysis, long-term traders mostly use fundamental analysis to build their strategies on.
Holding Forex positions for long time periods: Strategies
You have probably got it: when you follow the trend and hold your positions for long periods of time, which is often a matter of weeks, months, or longer, then you are doing the long-term Forex trading thing. In position trading, your buying behavior derives from your expectations regarding the future price, and your selling behavior is grounded on factual events that suggest you to sell.
When you are making an entry, you should be positive about the upwards trend that will allow you to gain feasible profit. You base your expectations on political and economical events in the regions where your currency of choice circulates. You can follow the elections process, for example, to the European Parliament, as there will be outcomes which will affect the EUR currency pairs.
You can hold your position as long as you witness all that you've foreseen happening. Surely, you cannot keep your position forever: you should also determine the event when you will be making an exit (after which you will either sell or hold what you have acquired).
If your actions correspond with the market trend, and the latter is favorable towards the long-term currency trading strategy of your choice, you can gain a solid profit.
Here, we have gave you a general overview of a long-term trading strategy that you can use. We should warn you, however. When you are trading, say, the EUR/USD pair, you should consider the events which might affect both currencies; concentrating on European Parliament elections and missing out the major events on the Wall Street or political games around the US Senate would be unwise.
Fundamental analysis, or thorough study of the fundamental events, is essential part of long-term trading. Here, you should become knowledgeable about a number of things, including general economic theory, the specifics of local economies, political and economical processes which take place in the present, stay up-to-date with the news, and take into account the possibility of "black swan" events. All this should be your priority when you have made up your mind to get involved in FX long-term trading.
More practical examples of long-term trading strategies
While we have given you an introduction into the practical side of position Forex trading, let us see how long-term strategies can be applied and executed properly.
As we have mentioned, the long-term Forex trading strategy begins with your assessment of the current political or economical events in the region which you are trading in. If you trade in the EU, then you should pay attention to everything that might affect EUR. Study the causes and relationships between different facts, analyze them, and make your predictions. If you feel strongly about them and believed that what you've foreseen will likely be true in the future, then you can think about opening a position with a EUR pair, especially considering its recent fluctuations.
At the same time, you should not leave the other currency in your pair unattended. Before you start gambe by trying to guess all the possible ways your currencies will interact in the light of a number of events, you could go the safest way by picking the currency that has the lowest chances of getting volatile.
While the EU is dealing with the immigration crisis, a far-eastern country, Japan, has no business in these matters. Besides, Japan's currency, yen, is known to have been considerably stable over the years. Taking all this into account, you may stop your choice at the pair of EUR/JPY.
So, you have made your primary forecast. Now, before actually starting to trade, you should do a double check. Make a list of everything important that happens on the political and economical level both in the EU and in Japan. Evaluate the chances of them making an impact on your currencies and plan your strategy or a mix of long-term currency trading strategies that would apply here the best.
Let's learn how to trade Forex long term
We have overviewed the general process of position trading and touched its most important stage — preparation. There are also a bunch of practical tips which will guide you through the long-term trading process, so that you will be able to keep your positions and, therefore, get the expected gains.
The first and most important tip is to avoid acting out of emotions. You should under no circumstances let the emotions take over. This will affect your decision-making abilities and force you into acting impulsively, out of fear, excitement, or greed.
The result? You will regret that you couldn't stay patient and either wait for your desired and predicted price behavior or, on the contrary, close the trade before you start to experience losses.
Losing trades that otherwise should have been winning or closing your positions too early and not getting the earnings you you would otherwise get — these are possible outcomes of not following your plan and acting out of emotion.
Hence, another useful tip that goes with any long-term Forex strategy: always predetermine the number of pips which will signal your next move. Having an expected profit in your head or, what's even better, in your trading notebook, will help you stay focused.
Some wisdom from experienced long-term Forex traders
While you must always remember that choosing among long-term Forex trading strategies is every trader's personal business, there are always general guidelines that you should study carefully and follow them. They will help you to minimize all the risks and save both your current capital and potential returns.
Go easy on leverage
As a positional trader, you should be aware of the fact that currencies can easily move several hundred pips up or down within just one day. It can be a lot more when it comes to the weekly price volatility. This is why you should be very careful when utilizing leverage: the smaller it is the better for your potential financial health. In long-term currency trading, you should avoid hitting the stop.
Careful with the Swaps
Good position trading strategies generate revenue, but your best long-term Forex trading strategy will generate you profit. These are not the same. The main pitfall of long-term trading is that you pay fees for keeping your positions open for longer periods of time.
They are called Swaps.
Swaps can be both positive and negative: you will either get paid for holding a position or will pay yourself. You should include this fact in your calculation of potential expenses and be ready for it. Also, it would be unwise to start the trade when the fees will exceed your profit.
So, before you start, make sure that with your long-term Forex strategies profitable outcome is more likely than losses due to Swaps.
The input/output balance
Long-term currency trading does not always mean high profits. The leverage offered to position traders is small, and quite significant investments are required to make the profit visible.
Also, you should remember that, apart from money, you also invest your time, knowledge, and skills. Are the expected returns worth it? This is why it's recommended to trade long-term with large capitals and always be extra cautious, plan, and follow your scheme.