Why I Vastly Prefer Long-Term Forex Trading
A long-term approach with forex trading allows for potentially greater profits with less capital investment.
Short-term trades have the disadvantage of triggering premature stop losses when taking risk and return into account.
A short GBP/USD position is one example of a long position that is faring well under current market conditions.
If you trade the forex markets regularly, chances are that a lot of your trading is of the short-term variety; i.e. your trades may well last less than five minutes, and all your trades are based on technical indicators, such as Simple Moving Averages, Bollinger Bands, Charts and Patterns, and so on. From my experience, there is one major flaw with this type of trading: high-speed computers and algorithms will spot these patterns faster than you ever will.
When I initially started trading, my strategy was similar to that of many short-term traders. That is, analyze the technicals to decide on a long or short position (or even no position in the absence of a clear trend), and then wait for the all-important breakout, i.e. breach of a previous range to confirm a particular trend, and then run along with it for a profit. I can’t tell you how many times I would open a position after a breakout, only for the price to move back in the opposite direction – with my stop loss closing me out of the trade. More often than not, the traders who make the money are those who are adept at anticipating such a breakout before it happens. As mentioned, computers can take such up-to-the-second information to discern when this will happen – humans will never be able to calculate changes in volatility, pattern formations and the like faster than those high speed computers built by programmers with skills to rival the likes of Bill Gates or Bjarne Stroustrup. My advice? Don’t try to take on the hedge funds in this game – you won’t win.
Additionally, there are practical considerations when it comes to this type of trading. First of all, while having a stop loss is always necessary irrespective of your time horizon, the absence of one during a short-term trade can prove fatal. Since a short-term trader is looking to make money on far fewer pips than a long-term trader, this invariably requires a greater degree of capital or leverage. A trade that goes significantly in the opposite direction to what you anticipate will likely wipe out your initial investment. Moreover, setting a stop loss at a range so as to avoid losing vast sums of money means you are not giving a position the chance to work for the long term.