We analyze the main differences between long-term and short-term Forex trading
In this article, we will consider the most basic thing – trading strategies, or rather, their types. You, as always, will find detailed answers to questions such as: What is a long-term trading strategy, what is a short-term trading strategy, what percentage of Forex traders make money in the long term, what time frames are better to use, how long can you keep an open position on Forex?
Forex Trading Strategies
As we already discussed in one of the articles, a trading strategy is a method of behavior in the Forex market in a particular situation. Most traders do not have a clear strategy, and it is for this reason that the amount on their deposits often decreases rather than increases. In general, the concept of the strategy itself is very extensive and includes a large number of factors. Let’s dwell on the most basic ones.
All that we need for a successful existence in everyday life is time and money. Everything is exactly the same on the exchange because it is also life, but local. Therefore, all you need for successful trading is taking into account the two most important parameters – time and money.
Based on this, all trading strategies are divided into:
- Strategies based on the amount of money. The main parameter when talking about money, of course, is the concept of risk. Therefore, such trading strategies are divided into low-risk and high-risk. There is a more subtle gradation, but, in fact, it also comes down to these two main characteristics.
- Strategies based on time. Over time, everything is a little more complicated, but all strategies will also be divided into two main types – these are short-term and long-term.
Let’s look at the main parameters by which we will compare our types of strategies:
- Time spent in the transaction;
- Profit size;
- Amount of deals.
Forex Short Term Trading Strategy
If this gradation is formed on the basis of the type of strategy with respect to time, then the main characteristic of such strategies will be the time spent in the transaction. In most cases, it is the time spent in the transaction that leads to the final result. There are several reasons for this, and we will consider them further.
In the figure above, a variant of the simplest trading strategy in a short-term format is proposed. This is a trading strategy – “on the breakdown of the trend line”. I think almost every trader knows this strategy. So, this version of the strategy is short-term for the reason that the time spent by the trader in the transaction will be only a few minutes. We proceed to consider the main parameters:
- Temporary timeframe. In this case, I used the M1 timeframe, which corresponds to 1 minute. In general, variations are possible for short-term strategies, but rarely when your chart is older than the H1 timeframe (one hour).
- The time spent in the transaction. In this case, our transaction, if it happens, then after a few tens of minutes we will know the final result, and possibly within five minutes. In general, in short-term trading, the time spent in a transaction almost never exceeds one day. It is for this reason that such strategies are often called intraday.
- Commissions. How many commissions we will have and which ones depend on what type of account we use and are in the transaction for longer than a day or not. In this case, we made a transaction on an ECN type account, which implies a low spread and a commission. So, let us make a deal with a volume of 1 lot. Currency pair GBPUSD, and in this case the commission will be 10 USD + spread 4 points or 4 USD. Since our transaction will take place within a day, we will not have a swap. Subtract 14 USD commissions from the final profit, and this will be our result of a short-term transaction.
- Profit in size. Since our transaction takes place within a day, therefore, the main parameter on which this profit depends will be the average daily volatility of a trading instrument. If the average volatility is about 400 points, it is foolish to expect a profit of 3000 points per day. In our case, the expected profit can be 240 points. To get a more accurate result, you need to subtract the commission from the expected profit. 240 points are about 240 USD profit – 14 USD commission = 226 USD – our expected profit is profit, which, given the average volatility per day, can be obtained in a couple of hours.
- Amount of deals. The number of transactions that we open directly will depend on the type of trading strategy. If we consider this trading strategy, then it has rather eloquent statistics, which says that the local trend during the day changes on average 3-4 times. This means that we can count on 3-4 transactions per day for this strategy. If all transactions are approximately the same profit size, approximately 700 points of profit are obtained. I think there is no need to say that this option is ideal and practically unrealistic in practice. Just believe me, it’s almost impossible to make 4 profitable transactions on the M1 timeframe in a day. Again, the average, based on statistics, will be around 50%. Total 2 profitable and 2 unprofitable. The trading result in points will be about 0. BUT! Do not forget about the commission? She doesn’t care if you make a profit or a loss, she is always charged. Total, 4 times for 14 USD and already 56 USD. So, on deals, we were where we were, but the commission drove us to the minus. And in order for us to become a plus, we just need to have a positive balance of profitable transactions. For example, out of 10 transactions, 6 profitable and 4 unprofitable. And then we will be a little in profit because the commission regarding profit is very high and will be more than 100 USD.