At LearningMarkets.com, we are known for advocating longer-term trading strategies over short-term trading. But while we feel that long-term trading is advantageous over short-term trading (especially for new traders), we understand that many traders enjoy operating in the very short term, and there are even a few who are successful at it. It is also appropriate to add that short-term trading can be fun. Some of us here at LearningMarkets.com allocate a small part of our portfolio to short-term trading because it is enjoyable.
However, long-term trading has the potential to be more profitable and provide more risk control. Plus, it is typically easier for new forex traders to learn and get started with longer-term trading strategies.
Short-Term Trading
We classify a short-term trade as anything with a holding period of less than a week. Short-term trading includes day-traders and scalpers, who may hold a position for a few seconds or minutes, as well as short-term swing traders, who may hold a position for a few days.
A great way to tell the difference between short-term and long-term traders is the chart period they favor. Longer-term traders tend to use daily charts. Short-term traders may use charts as short as one minute.
Long-Term Trading
A long-term trader falls outside the short-term horizon and is not only identified by the period the trade lasts but also by how the position is managed throughout the holding period.
Being a long-term trader does not mean you are a static trader who does not actively manage a position. A long-term trader may actively manage a position for several weeks to several months. Just to be clear, long-term trading is not the same thing as “buy and hold.”
Trader Beware
Of course, there are many participants in the forex market who have a vested interest in encouraging short-term trading over long-term trading because they make more money when forex traders trade frequently.
We encourage you to ignore much of what you hear from biz-op (business opportunity) and “get-rich-quick” programs and from dealers who encourage you to over-trade.
Biz-op and "Get-Rich-Quick" Programs
The retail forex world is overrun by seminar companies, advisers and system producers. It is more exciting to talk about a super-easy, short-term system with high-returns, and it sells much better. These companies know that. They advocate lots of trades, excitement and big profits — even if it will only produce lots of commissions/spreads, anxiety and fast losses.
This works for them because it means they are frequently in contact with you, and it is easier for you to become dependant on their advice, tools or system.
Dealers Who Encourage Over-Trading
This one is pretty obvious. As you can imagine, the more trades you make, the more money your dealer makes from your account. A higher volume of trades means more income for dealers — even from a small account. A lot of the free education offered by dealers is oriented around short-term trading for that reason.
Now we will look at the key differences between long- and short-term trading, and what you need to be aware of as you make decisions.
The Spread
Short-term forex traders immediately face a disadvantage because they trade more and have to overcome the spread more often.
To make a 1,000-pip profit when trading that same EUR/USD pair, a short-term forex trader who makes 50 trades must make 1,100 pips (assuming the spread on the EUR/USD is 2 pips), because he has to overcome the spread 50 times — once for each trade.
On the other hand, to make a 1,000-pip profit when trading the EUR/USD, a long-term forex trader can make one trade that moves 1,002 pips (assuming the spread on the EUR/USD is 2 pips). In other words, he only has to make 2 pips to overcome the spread.
Looking at this example, a short-term trader has to earn and additional 98 pips, or be approximately 10% more effective than a long-term trader has to be to earn the same profit. The bottom line is more transactions equal more transaction costs.
Over Focus
We find that many traders suffer from market tunnel vision. They are watching one or two pairs in the short term, and are unable to see what is happening in the rest of the market around them. However, the amount of attention it takes to manage one or two short-term trades with entries, exits and stops can preclude the short-term trader from seeing the trading opportunities on other pairs.
Short-term traders who miss these trading opportunities are unable to leverage the benefits of diversification and portfolio
management to control risk, which longer-term traders routinely take advantage of.
Flexibility
Short-term traders will often deal with bracket orders out of necessity. A bracket order, or one-cancels-the-other (OCO) order, means that you have predetermined your exits and have entered those orders at the same time you entered the position. Long-term traders have a greater ability to adjust their expectations, manage their trades and employ risk control as new information, price patterns and opportunities arise.
Most technical analysts agree that the validity of a trading signal is independent of time frame. Therefore, if the quality
of the trading signal is the same, regardless of its timeframe, you might want to consider giving yourself more time to make decisions.
Rollover
Short-term traders often miss out on rollover, or interest premiums, on a daily basis — depending on when they enter and exit their positions. Longer-term traders can create trades and groups of positions that benefit from interest payments in the long term.
Time Commitment
Long-term trading is typically also less time consuming since you don’t have to watch the live market all day, every day. Many new forex traders are working a full-time job, raising a family and having a life while they learn this market.
Checking in on your trades and making adjustments every once in a while, rather than constantly watching the live market throughout the duration of the trade, requires a lot less time and can be easily scheduled around your daily routine.
The Emotional Toll
Short-term trading requires a lot more attention to the market on a continuous basis. A much talked about aspect of trading is the toll it can take on you emotionally.
The longer you are in front of your trading screen watching the market zigzag back and forth between your limit and stop, the more tempting it can be to interfere with your strategy. This emotional toll increases the stress of trading and can make the whole experience unpleasant.
