Planning a Successful Long-Term Forex Strategy
Updated 11 October 2020
Many forex traders find success using long-term trading strategies. Taking a long-term approach, also referred to as ‘big picture’ forex trading, involves keeping hold of a transaction for a long period while considering all the factors that affect a currency pair.
With the right planning and execution, one long-term position can be more successful than several short-term positions. When it comes to forex strategy, ‘long term’ refers to trades that can go on for days, weeks, months or even a year or more.
This method is sometimes known as positional trading, as it involves holding one position for an extended term.
Although long-term trading strategies can be lucrative, they probably suit a certain personality type that is willing to be patient and forgo the excitement of short-term trading.
Although short-term trading (such as scalping) in forex is popular due to its reputation for fast profits, a long-term view is essential for correctly assessing data (technical analysis) and economic conditions (fundamental analysis).
A longer-term view is important when looking at forex charts, as viewing over a longer time-scale will reveal more about upward and downward trends, rather than short peaks or troughs in hourly charts which could be misleading.
Fundamental analysis involves the monitoring of economic/political factors, interest rates, employment and the monthly Consumer Price Index (CPI) for the countries associated with currency pairs. Looking at these factors with a long-term view can help you ride out market volatility.
There are many strategies that forex traders can take but playing the long game has its own unique benefits:
- Less stressful – As the position is held over an extended time, the small and fast changes seen on a daily basis are not particularly consequential – certainly not in the way they are for short-term trading. This makes a long-term forex strategy less stressful overall.
- Less risk – Managing multiple long-term positions can bring in a more stable income and the trader is better able to monitor, predict and act upon changes within the market. Especially good for volatile markets, the trader can weather the short storms for the longer-term gain, often meaning less risk is involved.
- Time-saving – Long-term trading strategies are less time-consuming than short-term ones, as there is no need for the trader to be at a computer for long periods. Initially, the trader must spend time tracking the markets and evaluating market forces before committing to a trade, but can then take a step back as they ride out market movements for an extended time.
- Investment requirements can be lower – In a short-term trade, the aim is an increase of, say, 20 pips (percentage in points; the percentage of change in a currency pair). In a long-term trade, a trader can target 200 pips or even more. The initial investment can pay off tenfold if the trader is prepared to go for a long strategy.
- Stop losses tend to work better on longer trades – On a short trade, once a stop loss is activated, the trade ends, resulting in losses. On a longer-term position, there is room for the market to experience short-term spikes and dips and then have the time to recover again with no stop loss trigger. The trade can then continue on its planned trajectory.
- Long-term trends can be profitable – Careful tracking of all the economic and geopolitical factors involved over a significant period (months or even a year) can result in huge wins for forex traders. Perhaps the most well-known example is that of George Soros who carefully observed the British trying to fight against market forces by fixing their exchange rate in the face of joining Europe’s Exchange Rate Mechanism (ERM) in the early 1990s. Predicting its failure, Soros heavily shorted the British Pound in 1992, pocketing $1 billion in the process. Playing to macro trends in this way is the perfect long term forex strategy.
- Avoidance of spread costs – The spread is the difference between how much you can buy the base currency for compared to how much you can sell it for. Non-commission brokers use the spread to make money. The cost is built into the trade and it is incurred for every trade that is placed. For short-term traders, the spread is a frequent cost that must be considered when planning and strategizing. In contrast to this, if a long-term trader is running only one trade over a long period, the spread becomes negligible in the grand scheme of things.
Change Your Mindset
For many forex traders, the buzz of the trade is a huge motivating factor and the high frequency of short-term trades provides a constant thrill. Taking the long-term approach is seen by some as a slower and duller trading experience.
If a trader can get past this perception and mental block, there is a profit to be had.
It is widely acknowledged that psychological factors play a big part in trading in general. Greed, fear, overconfidence and disappointment can all come into play and the more time spent in front of the trading screens, the more likely that emotional and psychological factors will affect decision making.
A long-term trader negates some of this by having to spend less time actively trading. A well informed long-term trader has prepared for market variants and accepts that a volatile market will see significant changes throughout the course of a trade. This means that the process can become less emotive and more transactional.
Set a Profit Target and Stop Loss
A profit target is a predetermined upper level at which a trader will close a trade. It is the opposite of a stop loss, which is the lowest point of pips from the entry price that a position can drop to before the trade is closed.
Both these limits provide sensible boundaries and prevent heavy losses incurred by emotional trading. It can be very tempting for an investor to hold their nerve when the market peaks, waiting for a continuation in the upward trend, but, inevitably, the trade comes crashing back down with devastating losses.
A profit target exits the trade before this happens, making sure that the trade has a successful outcome as the market peaks.
Have a Strategy and Stick to It
A successful long-term forex strategy relies on thorough research and a clear plan. Although the plan can be adjusted as the trade progresses, sticking with it ensures that decisions are made based on facts and trends rather than on emotion.
Although it sounds obvious, many factors come into play with every trading decision made and it’s very easy to deviate from the strategy, especially one being held over several days or months.
Before making any move, a trader should assess whether it’s part of the plan, what’s driving the decision and what is likely to happen as a result. Referring back to the initial strategy allows the trader to step back and make a cool-headed decision.
Look at Weekly Charts and Trends
Checking daily charts can be very tempting, but in a long-term trade, daily changes are not particularly significant. Weekly charts give a clearer long-range view of what the markets are doing and any trends that are emerging.
Trends over a weekly time scale are larger and more significant in general. Reviewing the charts weekly also prevents a trader obsessively checking throughout the day, allowing for better time management and a more rational approach.
Use Very Small (Or No) Leverage
Leverage (controlling a large amount of money using little of your own and borrowing the rest) is an important tool in a forex trader’s toolbox. Although the higher the leverage, the higher the potential profit, it can also work the other way and generate substantial losses.
For a short-term trade where positions are relatively small, more leverage may be desirable. For a long-term position, the increased pips involved mean that high leverage can be catastrophic if the trade goes wrong. For this reason, high leverage is neither desirable nor necessary in long-term trading strategies.
Not every long-term position has to be over a course of weeks or months. A position held for more than a day can be considered long term when in comparison, many short-term trades last a matter of minutes.
One forex strategy to implement over a day or a few days is swing trading. Swing trading involves holding a trade for several days at a time, observing the price swings and exiting on an upward trend.
This method is ideal for an investor who doesn’t want to trade throughout the day but who can observe the market once a day and can hold their nerve before acting. Waiting for the swing that occurs over a few days usually brings bigger results than short-term day trades.
Factor in Your Costs
Long-term trading can incur different costs that need to be factored into planning, namely swap and rollover.
Rollover is the net cost of holding the position overnight. End of day is officially 17:00 EST which is 21:00 UTC. If a position remains open at this time, rollover costs will apply. It’s not always a straightforward calculation, however, as holding a trade overnight can incur costs but it can sometimes generate a net return, depending on the interest rates of the currencies involved. This is known as swap.
Understanding the rollover and swap costs are important in planning long-term trading strategies.
Long-term trading strategies can certainly pay off. They require a very different approach to short-term trading and present their own challenges as well as benefits.
If a trader can forgo the exciting and fast-paced nature of short-term day trading, they can certainly gain from a measured approach. Taking a step back and studying the various factors that affect a country’s currency fluctuations can improve general trading skills enormously.
Understanding and being able to spot trends based on economic, social and political factors will result in a good knowledge of the international currency market overall.
Certain personality types may indeed be more suited to long-term trading than others, but if a trader feels that they could work in this way, their efforts can be greatly rewarded.
There remain risks involved in any sort of forex trading due to the often volatile and ever-changing nature of the global currency markets. A trader must be sure to use the appropriate measures to manage that risk and give themselves the best chance of success.