Investing in the forex market requires proper planning and a clear understanding of your financial goals. Once you know what those goals are, it’s a matter of adapting unique strategies to achieve those goals. There are two major strategies used by forex traders and investors: short-term investments and long-term investments.
From a distance, these two strategies might seem confusing, but an easy way to think about them is like a sprint and a marathon. In both scenarios, you’re running, but you don’t use the same strategy (speed) in a sprint and a marathon. So, let’s explore both strategies.
Understanding Forex Investments
You’ve probably heard the word “forex” before, and you might have been thinking about what it means. Forex is an abbreviation of two words – “foreign” and “exchange” – and in very simple terms, forex is basically buying one currency and selling it for another. If you’ve ever travelled outside your country and have had to change your home currency to the currency of the country you travelled to, what you did was a form of foreign exchange. That’s the whole idea, but when doing this on a global financial scale, it can get really complicated really fast.
First things first, the forex market is built on currency pairs, which means when investing in a pair like USD/GBP, you’re buying USD while at the same time selling GBP. Also, unlike some other global financial markets, the forex market is open 24 hours a day for five days a week, giving traders the opportunity to participate in market activities around the clock.
Plus, since the forex market trades almost all the currencies in the world, you can’t just guess the market movement of pairs. You have to carry out some form of analysis, which is where platforms like TradingView come into play, performing fundamental and technical analysis.
Short-Term or Day Trading
Short-term forex investments, otherwise known as day trading, are bought and sold quickly. These kinds of trades usually occur within a day, within a few minutes, a few hours, or two days at most. Think of it like a fast-paced game of ping-pong.
These kinds of trades are usually performed on lower time frames and price movements on the trading platforms are within seconds to a few hours. All that points to short-term trading being about fast-paced market movements. With that in mind, traders often rely on charts, patterns, and news updates to predict where prices will go next. It’s risky but exciting, like a fast-paced game where quick decisions can either win you money or lead to losses. To do it well, traders need sharp skills, a solid strategy, and a lot of practice.
Considerations of Short-Term Forex Investments
If you plan to trade short-term in forex, there are some things you need to take into consideration.
Market Volatility
When you trade short term in forex, the time frame is volatile and subject to quick price movements. Plus, as a trader, you only do this when you seek to turn quick profits on those quick currency movements in the market. However, it is important to note that although this high volatility can lead to significant gains, there is also the risk of losing your capital.
Technical Analysis
As a forex trader who plans on trading in lower time frames, the analysis of historical data and charts will help you make informed trading decisions and ensure that you’re not just guessing. This skill is not specific to just day traders, but is very important when trading in a volatile time frame.
Emotional Discipline
Executing fast-paced trades can pack quite the excitement, but it can also be mentally draining, especially when you incur losses over and over again. Having strong emotional and mental control is really important if you’re planning on trading short-term because market fluctuations can cause impulsive decisions or over-trading, which damages your prospects at long-term success.
Long-Term or Position Trading
Long-term forex trading is all about looking at the big picture and holding your trades for weeks, months, or sometimes even years. Instead of focusing on quick wins or daily price changes, your aim is to benefit from bigger trends in the financial market. Let’s say a country’s economy is growing or its central bank raises interest rates. Its currency might strengthen over time, prompting you to buy that currency against another. This type of trading can be less stressful because you don’t have to check charts all day and your investments can be more calculated.
Since you trade in higher time frames, the best part about long-term trading is avoiding the volatility inherent in day trading and the daily market ups and downs. However, it requires a lot of patience because it can take a while for your trades to reach their full potential. You’ll also need to keep an eye on big factors like how countries are managing their money, political changes, and global events. If you like to plan and think ahead, long-term trading can be a rewarding way to invest in forex without constantly worrying about short-term price swings.
Considerations of Long-Term Forex Investments
Here are three things to consider when trading in longer time frames in the forex market.
Fundamental Analysis
Using this strategy of forex investment means that your analysis is based on fundamental economic indicators such as GDP, employment rates, interest rate policies, and inflation. Why? Because these factors influence the strength of the currency over a longer period of time. To become a successful long-term trader, you need to stay up to date on macroeconomic factors around the world, fiscal policies, and geopolitical happenings.
Market Trends
You have to learn to look for patterns that align with prolonged economic developments, such as shifts in trade balances or sustained growth in a particular economy. By finding these trends and investing accordingly, you can secure significant gains over extended periods of time.
Patience Required
Successful long-term investment in any financial market requires the ability to remain invested despite short-term volatility. Be aware that currency markets are influenced by various unpredictable factors, such as political events or natural disasters, which can cause temporary disruptions. That should not move you to do something drastic.
Differences Between Short-Term and Long-Term Forex Investments
When considering forex investments in general, you need to understand the differences between short-term and long-term trading strategies. Each approach has its own unique characteristics, advantages, and challenges that directly serve your goals as an investor and also fit your personality and risk appetite. Here are some of the key differences between the two investment styles.
Investment Horizon
- Short-Term Trading: You can only hold trading positions for minutes, hours, or a few days at most.
- Long-Term Trading: You can maintain positions for some weeks, months, or even years.
Analytical Approach
- Short-Term Trading: You rely heavily on technical analysis, lower time frame chart patterns, and short-term indicators to identify entry and exit points.
- Long-Term Trading: You primarily use fundamental analysis, focusing on economic data, interest rates, and geopolitical trends.
Risk and Reward
- Short-Term Trading: Offers you a higher probability for quick gains but comes with very high risk because of market volatility and higher trading fees due to frequent transactions.
- Long-Term Trading: Lower transaction frequency reduces costs. Risks still exist, but they are tied to prolonged market conditions, like recessions or policy changes.
Time Commitment
- Short-Term Trading: Requires you to monitor your trades regularly and be able to make rapid decisions.
- Long-Term Trading: You don’t have to monitor your trades regularly because they’re longer and are influenced by broader economic trends rather than immediate price movements.
Psychological Demands
- Short-Term Trading: You need strong emotional discipline and the ability to handle high-pressure, fast-paced price movements that will not always be in your favour.
- Long-Term Trading: You need patience and resilience to endure extended periods of market fluctuations with no immediate returns.
Final Thoughts
There’s no right kind of trading strategy; each has its pros and cons and you should primarily focus on only two things: your goals and your personality. If you consider yourself to be a quick thinker who enjoys the thrill of making fast decisions, is willing to always look at charts, and can control your emotions when trading, then short-term trading might suit you. On the other hand, if you prefer a steadier approach and would rather watch your investments grow, long-term trading could be a better fit. Whatever you choose, staying informed and emotionally disciplined is key.
