Forex Trading is suitable for long-term and short-term investment goals. The decision to trade forex long-term vs short-term ultimately depends on you. In forex, both short-term and long-term trading come with their own set of pros and cons. The best way to maximize your profit and minimize risk is to understand the market and act following your financial objectives.
Trading on a short-term basis concentrates on highly fluctuating price movements and aims to make quick profits, while long-term trading focuses on more fundamental aspects and aims to make steady profits with time. Large companies usually concentrate on long-term forex trading. Meanwhile, some individual traders spend a lot of their time glued to the computer screens to make a few bucks in a short time.
But first, let’s clear up the big question.
Which is more profitable: Long-term vs short-term Forex Trading?
Well, there is no absolute answer. But there is one thing you can rely on. Long-term Forex trading is more likely to produce higher winning ratios and profitability, while short-term forex trading provides a higher compounding effect. Trading strategies may differ and work better for traders based on their risk appetite and personality types.
It doesn’t matter whether someone trades long-term or short-term forex with a disciplined approach, and a consistent style, there are limitless opportunities in the financial markets, and all strategies may be adapted by those with a little common sense and caution.
Let’s go over each in detail one by one to find out which is the best.
What is Short-term Forex Trading?
A short-term forex trading strategy involves holding currency positions for a short period rather than holding them for an extended time period.
In short-term forex trading, positions are held for a few minutes, hours, or even a day, normally no longer than seven days. As a result, there are fewer gains in a shorter time. For this reason, most brokers promote this type of strategy as the most rewarding and market it in a way that is appealing to traders. While being very attractive and lucrative, it does have a darker side that won’t always work in your favor, which is being risky. Not every trader can handle price volatility and the stress caused by short-term trading. Following the rules of risk management will help you survive.
However, short-term currency trading is extremely popular among beginners who aren’t confident about their risk management abilities. Despite the smaller risks, these trading strategies come with much more requirements. The short-term trading type is the most likely to test your agility, focus, and reflexes out of all the trading types.
Short-term forex trading typically involves utilizing derivatives, such as spread bets and CFDs. You can use these to buy or sell assets based on whether you anticipate the asset’s price will rise or fall, and you can make profits or losses based on how the market performs. With AximTrade’s short-term forex trading, you can use leverage to gain more exposure to financial instruments. Though this can also be risky, with the proper risk management plan and a successful trading mindset, any trader can overcome such risks.
Advantages of Short-term Forex Trading:
- Quick Profits: A major advantage of short-term forex trading is its potential for rapid gains. The market allows you to actively participate in it, so you can make money faster. A short timeframe allows you to buy and then sell your assets quickly, which can give you greater control over your money.
- Reinvesting profits: Trading short-term can compound your profits, so you can reinvest your capital by making more trades.
- Controlling risks: By closing your positions at the end of every trading day, you can minimize the impact of unexpected changes in the market overnight.
- Enhanced Profitability: Short-term trading offers the opportunity to capture price swings as soon as they occur.
Disadvantages of Short-term Forex Trading:
- Market Volatility: Trading short-term is considered risky. Volatility in the stock market can have a dramatic effect on your investments. It is possible to lose a significant amount of money in a short period of time.
- Unpredictability: Trying to figure out where the stock is headed can be very stressful.
- Demands Attention: You need to sit in front of your computer for several hours a day looking at charts. There is a lot of hard work involved in performing technical analysis.
- Trading Costs: As you make more trades, you’ll have to pay more commissions and spreads. Even a small increase in these trading costs can wipe out your daily profits.
Top short-term forex trading strategies
Scalping has emerged as the most popular strategy for short-term forex trading that aims to enter and exit positions within a few seconds or minutes. Since only small profits can be made from each trade, on an average trading day, scalpers carry out hundreds of transactions in order to make a significant profit. While these short-term trades may involve few pips price movements, when coupled with high leverage, they can lead to significant losses if not executed carefully.
Successful scalping traders require super-quick interaction with price movements, as they typically enter and exit trades within a few seconds or minutes. This strategy relies primarily on technical analysis and charts of a shorter time frame. Popular momentum indicators like a stochastic oscillator, relative strength index, and moving averages on price charts are also helpful.
Day trading applies to any financial markets or asset classes and is also a popular short-term trading strategy. The day traders trade several instruments throughout the day and close positions by the end of each day. They do not carry positions overnight, thus avoiding overnight fees.
A day trader often incorporates both fundamental and technical analysis. Analysts use hourly charts to spot recent price trends and decide whether to buy or sell a financial instrument according to price changes. Once they detect that the market is moving against them, they can exit quickly to avoid losses. This trading style can also magnify losses, making it best suited to experienced investors.
Best trading tools for short-term forex trading
Short-term forex trading can be profitable using several technical indicators. Let’s discuss the most popular.
- Support and Resistance: Breakouts are very common in trading. Support and resistance indicate possible areas where the price may change direction. You can enter or exit a trade based on support and resistance levels. Depending on how the price reacts from these levels, it may reverse or continue in the current trend. If a price breaks support or resistance, it is likely to move to the next level. Breakdowns of the channel, resistance and support lines can be a good trading signal. This strategy is useful for new traders, especially those just starting out.
- Moving Average: Moving averages are a useful tool for gauging the trend of average prices. They allow us to determine which side is most likely to succeed. If the market is in an uptrend, we want to invest in beginner sellers who are selling after a decline in price, or selling short when the market is in a downtrend.
- Candlestick Patterns: Traders look for candlestick patterns that indicate a market reversal and enter the market accordingly. By reflecting the buying and selling forces, these charts can be used to spot a trend continuation or reversal.
What is Long-term Forex Trading?
Utilizing a long-term strategy has proven to be one of the most successful methods of success in forex trading. In long-term trading, the time between entry and exit positions can range from a few weeks to a few months, even years. It is crucial to use the long-term scale to detect overall price trends, excluding shorter-term price fluctuations that can be misleading.
Long-term forex trading relies both on technical and fundamental analysis with daily and weekly charts. It’s a trading style where you hold your positions for a longer period of time. Most forex traders approach the market with a short-term trading attitude and plan. However, long-term strategies can yield greater profits and reduce risks for traders who utilize the right strategies.
Advantages of Long-term Forex Trading:
- Cost-effective: Since you take fewer trades on larger timeframes, you don’t pay a lot of commissions. Since the spread becomes indifferent for larger targets, you are not affected by it.
- Time-effective: If you trade long term, you don’t have to watch charts for long periods of time, just a few minutes each day and let the market do its thing. Your profits will be better with less work.
- Less stress: You will experience a less emotional rollercoaster ride by keeping away from charts. The setups and signals will be more accurate than short-term messy markets.
- Quality signals: Longer time frames often produce more reliable key levels and chart patterns. As a result, your performance will improve.
- Reduced risk: Trading long-term can offer a more stable income that requires less monitoring. Traders do not need to monitor prices constantly or react to frequent market changes unless required. Trading on volatile markets may be more appropriate for long-term investors.
Disadvantages of Long-term Forex Trading:
- Chance of missing out: Traders who engage in long-term trading may miss out on capitalizing on market volatility.
- It takes Patience: Trading in the long term takes patience. Impatient traders may end up making irrational trading decisions; exiting the market early and leaving behind more profits or giving up if the market moves in the opposite direction.
- Fundamental Knowledge: Long-term trading requires you to have a deep understanding and fundamental knowledge about what you are investing in. Making decisions based on news, tips, or hearsay is not a good idea.
Top long-term forex trading strategies
Positional trading is a popular long-term trading strategy in which traders hold positions for long periods of time, usually months or years. It involves identifying a trend and following it over time. Unlike short-term traders, position traders rely on more precise fundamental analysis and long-term trends to determine their strategies.
Position traders usually don’t trade actively and are frequently surpassed by long-term buy and hold in terms of the length of time they hold their positions. An effective position trader is one who can identify the right entry and exit points and place a stop-loss order when necessary.
A swing trading strategy is perhaps the best Forex trading strategy for beginners. Forex traders use swing trading to profit from price swings using a medium-term trading style. Trading this way requires patience to hold trades for several days at a time. Before entering a position, swing traders try to predict when and where the price is likely to move next. Then, they ride the ups and downs of the asset. They may close the position only when the pattern no longer appears to be following.
Swing trading is most suitable for people with full-time jobs or students who have enough free time to stay up to date with what’s happening in the global economy. Using fundamental or technical analysis, swing traders can predict if a particular currency pair will rise or fall in price in the near future. Keeping calm and believing in your analyses is the key to swing trading.
Best trading methods for Long-term Forex Trading
- Take a look at the Monthly and Weekly charts: Over the long haul, trading within daily and lesser timeframes is not as important as trading within longer frames. You can see long-term price trends more clearly by looking at weekly and monthly charts. Besides requiring less monitoring, they also ease trading stress through better time management. You should look for trends on the longer-term charts that have good momentum in the direction you are interested in. Make it a point to only looking for entries in the direction of the trend (for instance, if it is a bullish trend, look for buys).
- Set Stop Loss and Take Profit levels: Trading forex requires balancing both potential profits and losses. It’s also known as forex risk management. Setting the take profit and stop loss levels are crucial when trading long-term. This is the point at which a trade will close on profit if it reaches the take profit. Alternatively, the stop-loss price is the price at which the trade will also be automatically closed to prevent further losses if the market moves against you.
- Use Low Leverage: Leverage involves borrowing money for the purpose of generating additional investment returns. The investor benefits as long as the return from the investment exceeds the borrowing costs. For example, on the EUR/USD currency pair, 500 units are equivalent to 500 dollars, and every pip is equal to 0.50 dollars, or 50 cents. Even a profit of 100 pips is equal to $50 in profit or a 50% increase. A loss of 100 pips would wipe out 50% of your trading account, leaving you with only $50. As a result, most forex traders lose money when using high leverage.
- Pay Attention to Swaps: Long-term Forex investing strategies can generate decent returns, but profits are what matters most. Keep an eye on swaps – the overnight holding fee. Some swaps are positive. However, in many cases they will be negative irrespective of the direction, so making long-term Forex strategies profitable requires evaluating their expenses. Sometimes, you can use a strategy where the benefit of the swap outweighs the pip gain.
Short-Term vs Long-Term Trading: How to choose?
When it comes to trading securities, short-term and long-term trading are both viable options. It is perfectly possible to generate substantial profits with either type of trading strategy. The most important thing is to discover which way suits your needs. We will examine the differences between the two forms of trading and how each affects the trading approach:
Both types of trading require a different amount of capital. Making money is the goal, but to start you’ll need a small amount of cash, which is the key difference between these two methods. Trading with large capital tends to be long-term, while short-term trading is popular among small investors. One can also invest in the long-term with small investments if one has the patience to wait a long time. Educate yourself about your investment assets and focus on your commissions. Starting with tiny amounts will help you get the hang of it if you are a beginner.
Long-term trading differs from short-term trading primarily because of the required amount of time to invest in the market. In short-term trading, a trade is opened and closed within a single day or few days, while in long-term trading, a trade may last up to months or years. You’ll need to spend a couple of hours a day watching the market if you want to earn money every day. When you don’t have the time to constantly follow the market due to your day job, long-term investments are a great option to consider.
Personality and Skill Characteristics:
A trader’s skills and personality are intertwined, and it is obvious why this is important. You’ll soon discover that each trading style requires different abilities and mindsets. Both types of trading require commitment, since you have to conduct research, study various techniques and select the best one, and so on. Once you have chosen a strategy and worked out the details, you must learn how to implement it.
Beginner traders may find long-term trading challenging until they master the basics and gain experience. It’s essential to be patient and control your emotions because you cannot allow yourself to panic or react until the timing is right. If you follow these guidelines, you’ll be more likely to profit than people who ignore them.
Returns on Investment:
Traders often consider the potential profits when making the decision whether to pursue day trading or investing over the long term. A trader’s primary goal is to generate profits, so they always select the option with the highest potential returns. Over the long run, long-term investments can earn millions without negatively affecting performance. In contrast, short-term traders’ performance will suffer regardless of how much money is in their accounts. You may be able to earn between 0.5% and 3% every day as a short-term trader. Even though it’s a small sum per day, it’s equivalent to 10% to 60% of your wealth every month, which is much better.
Meanwhile, long-term traders should expect to earn an average of 10% each year, but this will vary from year to year, and returns can be significantly greater or lower at times. They usually do not need to do anything other than wait and observe the market’s performance.
Best Broker for Long-term and Short-term Forex Trading
You are responsible for your own decisions. As previously stated, you can do both simultaneously if you wish, or you can focus on one based on how much time, money, and effort you wish to spend.
No matter what path you choose, always remember that patience is crucial. Allowing your emotions to overwhelm you can only lead to a costly mistake. Whether you are a short-term or long-term trader, you need a reliable broker like AximTrade, which provides the best trading conditions that suit your investment goals. Check out the AximTrade Review to learn more.