Short term vs. Long term profit in Forex
Due to many approaches to forex trading, traders can sometimes feel confused when determining which system should be employed at the start of their trading career. Fortunately, you can classify all trading strategies and styles into two large groups based on the time horizon. These categories are short term vs long term trading which we will discuss in this article.
Short term vs long term Forex trading
Long term Forex trading
Long-term traders generally choose to base their trading on the technical aspect rather than the fundamental. One of the major advantages of long term swing trading is that you don’t have to find investment opportunities (trading signals) every day. By speculating for the long term you are not forced to cash in quick wins and find new trading opportunities, you can speculate but generally stick to a market trend that spans several weeks or even months when you find a good trade.
Some of the greatest investors of our time, such as Warren Buffet, rally behind the long term trading strategy.
Advantages of long term positions
- Less stressful since you have plenty of time to analyse and make decisions.
- Time-saving because you don’t have to monitor the trends all the time.
- Better cost-profit ratio since you open position less frequently and hence you pay less for commission.
- You can easily adjust your trades according to the latest economic news in order to react to the market appropriately.
The risks of long term trading
- This style is not for the traders who like adrenaline and are kind of impatient.
- You need to have considerable knowledge of fundamental analysis.
- In-depth research of the market is crucial here. Therefore, traders must be versatile in commodity prices, interest rates and many other factors to beat the market.
Short term Forex trading
Short term traders wishing to generate quick profits usually practice technical analysis in order to achieve their goals, fundamental analysis and also an option that these traders choose by observing in the economic calendar the most important economic announcements and whose impact on the Forex market is brutal in the short term (over a few minutes, or a few hours).
Getting profit in the short run is not easy for beginner traders but is achievable. Short-term trading (scalping) strategies involve opening and closing positions for short periods of time (usually five minutes or less), at most a few hours. In many cases technical analysis is the weapon of short-term traders, during important economic publications (GDP, NFP) fundamental analysis also proves to be a particularly effective tool. However, strategies based on the use of technical indicators remain ideal in order to speculate in variable and volatile market conditions.
The main advantages of short term trading
- You can reap the profit in a matter of hours or days.
- You can take advantage of side markets and capture every swing when currencies are highly volatile.
- Most of the technical charts and analysis are suitable for the short term investments.
- Every time you make the wrong move you can close position immediately and invest in some fresh currencies.
Risks of short term trading on Forex
- It may lead to high trading costs in case you open a position too often and you have to pay more commissions.
- Significant losses mostly due to the fact that short term traders often use the margin call. Thus, the risk and loss probability are higher.
- It’s more stressful than long term positions because there are many uncertainties in the game and many things can happen in a short time span.
- It’s time-consuming since this trading style requires constant monitoring of new trends and charts meaning you have to be glued to the screen.
If you wonder what of these two approaches is better, we must say that there is no definite answer. In general, long term position has the bigger winner percentage, but short term position is better in terms of compounding effect. However, success depends on your ability to read market trends and your trading personality.