Long-Term Or Short-Term Trading: What’s Best?
When you are defining your forex trading strategy, one of the biggest considerations is whether you will commit to short-term trading or long-term trading. Here’s an overview of what both these strategies involve, and how to decide which one might be best for you.
What is short-term trading in forex?
Short-term trading is also known as day trading. It usually involves holding an open position for no longer than one day, and can even involve just a few minutes. At the very maximum, short-term trades are executed within one week. This is a popular strategy among new and part time traders, because it minimises the risks involved.
That is not to say that short-term trading is without risk, because it is impossible to eliminate risk from any aspect of trading. You will also need to be confident in your knowledge of the markets, and quick in your reactions and decision-making processes. It’s probably not for you if you are prone to getting stressed out under pressure.
Short-term traders are also known as scalpers (when the position is held for anything from a few minutes to a few days), or day traders, who always carry out their trade within one day. In forex, scalping is the most popular strategy. It involves building up profits in very small but frequent amounts, and many trades are usually made within one day.
What techniques do you need for short-term trading?
While there is no one definitive set of techniques used by all short-term traders, most will use a combination of both technical and fundamental analysis. Technical analysis involves using charting tools to identify the past behaviour of pricing patterns, and making predictions based on the balance of probabilities.
Fundamental analysis involves ‘reading the room’ in terms of the wider economic outlook. The markets can be affected by data such as changes in interest rates, inflation, GDP, and the unemployment rate.
This information is released on a regular basis by sources from all the world’s major economies, and can be tracked on an economic calendar. Wider geopolitical and socio-economic events, such as elections, wars, pandemics, and natural disasters, also impact on the forex markets.
Who is short-term trading suitable for?
Short-term trading is intense and demanding. If you can keep your cool under pressure, and are comfortable making quick decisions, then this may be the right approach for you. It can be very beneficial to read up around the psychology of forex trading. This will help you to be aware of your emotions, and find ways of keeping them in check.
Above all, in a fast-paced environment where your reactions and technical skills need to be sharp and precise, remaining emotionally detached and analytical in your approach is paramount. Quick thinking should not be confused with impulsiveness or haste, which will lead into poor decisions sooner or later.
If you have an impatient personality and feel drawn to the pace and excitement of short-term trading, remember that you will need mental stamina and discipline to make any impact. The most successful traders are not swayed by anger, excitement, fear, greed, pride, panic, or any of those other human emotions which cloud our judgement.
Do you have the time for short term trading?
So, you have decided that you have the personality and technical skills for short-term trading. The next question to ask is, can you meet the time commitments? To have a real prospect of making a profit at short-term trading, you will need to commit to at least a few hours a day, on several days of the week.
It is possible to fit short-term trading around a day job, if you work a typical 9-5. This is because the markets are most active first thing between 8-9am, and at the end of the day, between 6-9pm. If you can fit these hours into your schedule, then it’s well worth giving it a go. If that doesn’t sound feasible, then long-term trading may suit you better.
What is long-term trading in forex?
Long-term trading typically involves waiting for weeks or even months to take a profit on a trade. Whereas short-term trading involves making multiple very small profits in a short time frame, long-term trading aims to take a larger profit over time on far fewer positions.
It is better suited to traders who are not able to make a big time commitment. You can simply open one position at a time, and then monitor it over weeks or months until you identify a good opportunity to buy or sell your currency pairs. Unlike short-term trading, there is no need to constantly monitor the market fluctuations and price action.
It is also less intense and highly-pressured than short-term trading, so if you dislike having to make quick decisions, then you will probably be better suited to long-term trading. You will have the opportunity for thorough and methodical research and analysis, which suits those who are naturally cautious and careful in their work.
What skills do you need for long-term trading?
Long-term traders (also known as position traders) tend to rely more on fundamental analysis skills than technical analysis. It still requires a thoroughly researched strategy to ensure the best possible chances of taking a profit. Always have a risk management plan in place, and set a profit target and a stop-loss for each trade.
A stop-loss acts as a defence mechanism, to limit your losses on a trade, should the market conditions change unfavourably. However, it is important to remember that a position can fluctuate quite a lot even within 24 hours, so it is important to accommodate this within your stop loss.
As with short-term trading, it’s important to maintain your emotional discipline, and not be panicked into closing out a position too early if you fear that the market is about to turn. If you are naturally a patient personality, who enjoys looking at the bigger picture, then long-term trading may be the right strategy for you.
What if you can’t decide which strategy is best for you?
There’s no reason why you shouldn’t combine both long- and short-term trading in your strategy, if both techniques appeal to you equally. In fact, many successful traders do just this.
Trying your hand at both may reveal what you are really cut out for: a taste of the excitement of short-term trading may bring out hidden strengths and mental agilities that you didn’t realise you possessed. On the other hand, you may find that you have a good instinct for fundamental analysis which is best suited to long term trading.
If you are new to forex trading, it’s really important to road test your strategies with a demo account before going live. This gives you the opportunity to trade with real-time data with taking financial risks. It will give you a chance to get familiar with your broker’s account user interface, so that you can find your way around quickly and easily.
A demo account will give you a taste of what it’s like to make quick decisions, or to build up the emotional resilience to ride out a period of turbulence in the markets. Many new traders don’t fully realise that making a loss is all part and parcel of forex trading, and even successful traders only make winning trades about 50% of the time or less.
The key is not to be overly discouraged by failure, or become too emboldened by success, as both these emotions can lead you to stray off your carefully plotted path.
Risks and advantages of each strategy
To sum up, here are the main risks and advantages of each approach.
Advantages of short-term trading
You can make potentially quicker profits, because each trade is made within a short time frame. The close monitoring of the markets required means that you are more likely to be well placed to take advantage of the major swings when the markets are volatile. If you pick the right moment to buy or sell, you could potentially make a large profit.
The risks are usually smaller when you are making short term trades, because you will mostly be trading in just a few percentage points each time. The quick and close nature of the trading means it is easy for you to identify and rectify any mistakes.
Risks of short-term trading
Short-term trading is time consuming, demanding a minimum of 15 hours a week. It is also intense and highly pressured, and you will need emotional resilience, mental stamina, and a confident grasp of technical analysis, such as candlestick pattern charts. If you do not have a sound risk management strategy, you could also make heavy losses.
Advantages of long-term trading
Long-term trading is less time consuming, and less stressful than short-term trading. You can extend your profitable positions to make the biggest gains, and adjust your stop loss and profit targets according to market conditions.
Disadvantages of long-term trading
If you are looking for the thrill of the chase, then long-term trading might be too dull for you. It also requires an in-depth approach, with a strong grasp of both fundamental and technical analysis tools.
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