Is short-term forex trading more profitable than long-term forex trading? Well, the topic has been under debate for a long-time, and yet there’s no explicit answer. Renowned traders such as Warren Buffett and Shelby M.C. Davis rally behind this wisdom. There’s power in letting your capital sit in court for a specific period, but it doesn’t mean the second method of closing your positions early is less powerful.
Nevertheless, let us comprehend the discussion – long term forex trades vs. short term forex trades.
Maximizing profit and minimizing risk
In the Forex, maximizing profit and minimizing risk is dependent not only on the understanding of the market but also on yourself. Both short-term and long-term trading have pros and cons, but when the big question arises that which is better, there is no definitive answer for that. A short position in the Forex market tends to have a more significant compounding effect, whereas a long market position gives a greater profitability margin. Traders might prefer short-term trading over long-term trading and vice versa. But it’s because there is a specific trading strategy that suits a particular personality type and risk appetite of the trader.
Short-term Forex Trading:
When a trader enters the market and holds his position for just a few minutes or less than seven days, it’s considered short-term trading in Forex. Speaking from Broker’s viewpoint, this strategy is profitable to many brokers that market and sell it to traders in the most attractive way possible. The Broker’s profit depends on the customer trading volume, and in the forex term forex trading, a trader opens and closes positions simultaneously, generating more profit for the Broker.
But at the same time, forex traders can also benefit from short-term trading as they can capture new trading opportunities. Indeed, there are pros and cons of short-term trading, and in this guide, we will discuss them in detail.
Pros and Cons of Short-term Forex Trading:
Let’s take a look at the advantages and disadvantages of short-term trading.
Pros of Short-term Forex Trading:
- Quick Profits:
Earning a profit in short-term trading will be quick as a trade can be executed in just a matter of minutes, hours, or days. In short-term trading, the forex traders can profit from the positions they open and close immediately within a few minutes, hours, or days. Mostly scalpers and intraday traders take advantage of short-term forex trading.
- Additional Earning Potential:
A trader can benefit from both short-term trading and long-term trading. However, in short-term trading, the potential earning increases as traders can open and close positions during choppy market sessions. They can play within narrow trading ranges by selling at the top and buying at the bottom, especially during thin volatility periods. They can benefit from trendy markets by opening intraday positions, and this way, they can double the potential profit.
- Minimizing Risk:
The risk involved in short-term Forex trading can be minimized as whenever a trader realizes that he has entered wrong in a trend, he can close his position and free up his capital for reinvestment. By doing so, a trader can re-enter the market to encash another trade setup and earn more profit. It’s much easier to cut losses when the market is not far away from your entry points. In the short term forex trading, the impact of fundamental news events is easier to predict. Most of the forex traders trade the market on the news, capture quick pips, and immediately close the position with a minimum risk involved.
Cons of Short-term Forex Trading:
- High Cost of Trading:
Short-term trading also comes with a few shortcomings, such as the high cost of trading. For each trade opened, whether with profit or loss, a forex trader would pay a commission/spread to the broker company. The more frequent trades will result in more commission payable, which can quickly add up, leaving traders with a little or no percentage gain in some cases. This is the reason behind the marketing of short-term trading by many brokers instead of long-term trading. Honestly, the commission or spread payment doesn’t bother you if you start making profits via short-term trading.
- Significant Losses:
In short-term forex trading, the odds of losses soar, especially when the market is highly volatile. Similarly, the odds of having a margin call also increases the risk and size of losses despite offering higher returns. In short-term trading, a day trader heavily relies on leverage; thus, his risk level and chances of incurring losses increase significantly.
- High-Stress Levels:
In short-term trading, the stress level of traders increased due to the market’s unpredictability. The stress level is also high because the traders are mostly in a zero-sum game as they are up against the professionals who might be more well-informed than day traders. However, the use of a proper risk management strategy can help reduce the stress level.
- Increased Attention & Focus:
Timing is crucial in short-term forex trading as the window between buying and selling is short. Thus a trader has to glue to their screens continuously to capture each trade opportunity, and this requires a lot of attention and focus from the trader’s end.
Types of Traders in Short-term Trading:
There are two types of traders involved in short-term trading named Scalper and a Day Trader.
The traders with intentions of holding positions for a few minutes to just a few days and are into fast-paced trading are known as Scalpers. The main aim of scalpers is to take profit from small pips as frequently as possible to add them up. Scalpers are more active during the busiest hours of the day.
The type of traders that tend to hold a trade position within a day are known as day traders. They tend not to hold their positions for more than a day, regardless of whether they end up with a profit or loss. Day traders close their trades at the end of the day and do not buy or hold overnight positions.
Timeframes in Short-term Trading:
The most popular time frames for short-term trading are M30, M15, M5, and M1. Higher the timeframe set by a trader, lesser candles he will have to deal with within the daily data. For instance, there are six H4 (4-hour timeframe) candles in a day, 24 M60 candles, 48 M20 candles, 96 M15 candles, and 288 M5 candles. The technical analysis trade setup depends upon the closing of each candle. If we are looking at smaller timeframes, we will have many more opportunities to capture than with 4H or Daily timeframes.
Markets for Short-term Trading:
Following markets are suitable for Short-term forex trading:
- Stocks market where shares from companies can be traded both in the long and short term can help close out trades after few hours or at the end of each day to gain intraday profits.
- Indices follow a similar stock trading pattern but include speculating on different company shares rather than an individual stock. It is a much larger market than stocks, and various factors can affect the position.
- Cryptocurrency markets are open 24/7 and have plenty of opportunities for short-term traders as the crypto market is the most volatile these days.
- Commodities trading such as gold, copper, oil, and silver also allow traders to take a shorter-term view of the asset.
Short-term Forex Trading Strategies:
Following are the most popular types of trading strategies that can be adopted while doing short-term trading in the forex market.
- Support & Resistance Trading:
Support and Resistance trading is a technical approach and is considered one of the best ways to approach the Forex market in the short-term. Traders open a short trade if the price action breaks a support level downwards. Similarly, if the price action breaks a resistance level upwards, then traders open a long trade in the market.
Managing risk levels in this strategy are comparatively easy and straightforward. Traders put a stop-loss order beyond the support or resistance levels. In a short trade, the stop-loss is placed above the support level, and in a buy, trade stop-loss is placed below the resistance level
- Trend Hunting:
The next trading strategy in the short-term horizon is trend trading, which involves catching intraday trends and following them until they collapse. Furthermore, traders can consider opening a new trade in the direction of a recent breakout when an intraday trend gets interrupted. This strategy is also pretty reliable and straightforward as a trader waits for a currency pair to bounce off for the third time from the same trend line and then open a trade in favor of the same trend. In technical analysis, the trend is considered your friend, and once you enter into a trendy trade, it has a high probability of hitting take profit.
Long-term Forex Trading:
A trading technique to wait for weeks and months to gains profit is considered as long-term Forex trading. Traders tend to have a bigger picture in mind while trading for a more extended period as they are not in for pennies but more significant gains. Long-term trading is done for earning more profit as a long-term position can provide more generous benefits than the sum of hundreds of smaller positions.
Pros and Cons of Long-term Forex Trading:
Pros of Long-term Forex Trading:
Following are the advantages of long-term Forex trading strategies:
Long-term trading saves traders’ time compared to short-term trading as traders tend to take a position in the market and then hold it for a long time rather than keep looking at the screen to close the trade with profit. It also saves time as forex traders do not need to stick to screens daily to spot new opportunities.
- Less Stress:
Long-term trading eliminates the need to monitor the market and charts constantly, and by doing so, traders reduce the stress associated with it. A trader can do thorough research once to spot buying and selling trade and then sticks to trade.
- Potential for More Profit:
In long-term trading, a trader can stick to the winners and extract profit as much as possible as he does not need to cash out quickly, unlike short-term trading. Furthermore, long-term traders can also earn extra from doing a full-time job and trade simultaneously as they do not have to sit and look at screens all day.
- Better Cost-to-Profit Ratio:
In long-term trading, the cost of trading becomes almost negligible as a trader doesn’t have to pay high commissions due to fewer trades than short-term trading in which a trader opens multiple trades in a single day. Furthermore, in the long run, the costs like swap and rollover also become minimal or, in some cases, become even positive.
Cons of Long-term Forex Trading:
Following are the disadvantages of long-term Forex trading:
- Not for Impatient:
Long-term trading is not so popular because of the traders who are used to instant lottery minds and don’t have the patience to sit and wait for their profit. As long-term trading transactions are sometimes held for months and quarters, the intra-day traders cannot withstand such a period because the thrust for instant profit always wins.
- Requires Broad Knowledge:
Long-term trading is not for starters and newbies as it requires full knowledge of market, fundamental and technical analysis. Short-term trading is a simple guessing game, but a complete and sure knowledge of trends is a must for long-term trading. Comprehensive research about the prices, interest rates, long-term trends, global factors, and economic news and fundamentals is required
- Large Trading Deposit:
Holding a trade for an extended period requires a large sum of the deposit. Most traders start their Forex career believing that a small deposit will be enough. But it’s not the case in long-term trading as the risk involved is greater; therefore, the deposit amount should also be larger to manage the trading risk.
Types of Traders in Long-term Forex Trading:
There are two types of traders involved in long-term forex trading:
The traders who hold their position in the market for several days or weeks hoping that the trend or pattern will change its course are known as swing traders. These traders identify a possible trend to hold for a certain period and tend to profit from the price swings while using technical analysis tools.
The traders that wait for a longer period are known as position traders. No one can beat these traders in the waiting game. The position traders can wait for days or even years to close their position in the market as they have entered, intending to earn profit from long-term opportunities. Position traders use fundamental and technical analysis to identify profitable trades.
Markets for Long-term Trading:
Following are the markets suitable for Long-term trading:
Growth Stocks include stocks from most tech companies that promise high growth and high return on investment.
Stock Funds that include ETF or mutual funds that promise profit from a broadly diversified fund.
Bond Funds are similar to stock funds, but they contain numerous bonds from a range of suppliers. This is considered a safer and stable investment.
Dividend Stocks receive a regular cash payout from stocks of more mature companies.
Real Estate gives a higher return on investment as the longer trader holds, the higher ROI. It can also be used as collateral and borrow money for most of the investment.
Long-term Forex Trading Strategies:
Following are the Long-term Forex trading strategies used by traders to enter the market:
- 200 Day Moving Average Trading:
In this strategy, the trader uses a 200-day simple moving average (SMA), calculated by the last 200 trading days’ average closing price. This average is used to determine the long-term market trends. When the currency pair remains above the 200-day SMA, it is expected to trade bullish. Similarly, if a pair’s price stays below the indicator, this pair’s trend is considered bearish. Thus, a trader should open a trade position accordingly.
- Trend Trading:
This long-term trading strategy includes scanning for a fresh high or low and opening trade as soon as these levels get violated. The idea is to wait for the market to close candles three pips above or below these high or low levels and then opening a buy or a sell position from there. Later on, forex traders can move their stop losses to breakeven points as soon as the market enters into the profit.
- Swing Trading via Technical Indicators
Long-term traders also enter the market based on various technical indicators like Moving Averages, Relative Strength Index (RSI), and Visual Analysis. Traders try to spot a bullish or a bearish moving average crossover on the weekly or monthly timeframe to enter a buy or a sell trade. At the same time, traders ensure that the RSI and MACD values also support the bullish or a bearish bias. Once all of the indicators support selling bias, such as the current market price (CMP) is below the moving average, RSI is below 50, and MACD is below 0, the trader can take a sell trade and hold it until the scenario reverses. This strategy has a success ratio of up to 75%; therefore, solid risk management is needed.
We will conclude my discussion with ending remarks that both of the trading styles, short-term and long-term, are equally better. However, their importance and effectiveness can vary from person to person. A trader with limited capital and less tolerance for holding long-term trades will prefer short-term trading. Conversely, a trader with a bigger sum of capital and holding capacity would like to go for long-term trading. However, this may take a test and trial method for every individual to define the type of trader you, a short-term or a long-term forex trader. Well, We hope this guide helps you understand short-term and long-term Forex trading. Stay tuned for more exciting updates!