Short Term Forex vs. Long Term Forex Trading
Short Term vs. Long Term Trading
In short, forex traders as a whole can be categorized into 2 distinct groups, short term traders and long term traders. When selecting the style of trading that best fits you, knowing the differences between the two is beneficial. Knowing the positive aspects and conversely the negative to a trading style is very important as well.
To start we will examine the positive aspects of short term trading. The first and most evident draw to short term strategies is the fast passed action. Day trading or scalping the forex market can be a very exciting career once you become profitable. The allure of fast quick money is something that draws most new comers to the market, and thus to some form of forex scalping strategy. Now that allure of quick money is not just a dream but in fact once you are proficient at scalping, becomes a reality. Another advantage to trading short term is the lack of exposure you have to the market. Often positions are only open while you are in front of the screen and closed when you leave or turn the computer off. Having zero risk when you walk away from the computer is something many traders value.
Now lets examine some negatives. Most notably is the high stress environment of trading short term. Often most traders new to the forex market think they can jump in head first. Without a proper forex trading education most new short term traders will fail to realize how to handle the pressures involved with day trading, and more often than not fail because of it. The fast passed price action of scalping is something that can only be conquered with huge amounts of time behind the screen, or what is most effective, watching a scalper that is already profitable trade live. A second drawback to short term strategies is the intra-day volatility. This affects not only entry timing but in addition to that volatility effects stop loss locations as well. Even if you have the right direction, the wrong stop location will cost you the trade. While good timing on entries and exits in long term trading is nice, its not crucial. In most short term strategies its everything!
Long term forex trading is more of the buy and hold type strategy. Unlike short term trading, position traders look to capitalize on the overall direction of the fx market and could care less about each individual days volatility. More often than not positions are placed based on fundamental direction of a currency, unlike short term traders where technical analysis usually takes the spotlight. Long term traders also known as position traders may only place 1 or 2 traders a year. Instead of having to look at the market on a daily basis they may only take a look at their position once a week, or potentially even less. A position trade can be held for weeks, months, or even a year or longer depending on the length of time it takes for the take profit to be hit, or the stop loss should things go the wrong direction.
An advantage to position trading the forex market is the length of time required to trade. It is not required that you sit at your computer every day. Even if you have a full time job finding the time to place a trade would not be an issue, and keeping up with your trades requires only minutes per week as long as the underlying fundamentals remain the same. For this reason long term trading is uniquely fitted for the investor with a day job or otherwise busy schedule.
A few draw backs to long term trading are first and foremost the lack of action. If you are an active investor, waiting months for a trade to develop is simply not an option. In addition to that trades, once entered, are in the market all the time. World events and other unforeseen circumstances can effect that position at all times, proper stops losses are mandatory. Position trading in the forex market also opens you up to something called swap. When you buy a currency pair you are selling the second currency in the pair. If the first countries currency does not have a higher interest rate you will be charged interest, otherwise known as swap.
Over all ever form of trading has its advantages and disadvantages. Listed in this article are just a few. When you are selecting your trading style you should examine your lifestyle and yourself as a person. Do you like excitement of active trading? Are you protecting capital or building capital? Do you want to be in front of the screen daily? How much free time does your current schedule allow for trading? All these questions are practical in selecting a trading style and as you examine yourself and your schedule you will see the trading style that fits your lifestyle and personality the best. If you see yourself as more of a short term forex trader and would like to learn how to profitably day trade the forex market, then feel free to learn more through our members forum and forex course.