When most people think of currency trading, they picture it as a short-term activity where traders make money from day trades.
But this gives the wrong impression of forex trading as a way to get rich quick, and ultimately, holding a position long-term may prove to be more profitable than a series of short-term trades.
How long does a trade have to last to be considered long-term?
There is no widely-accepted definition but generally, long-term trades are those that last several weeks or months.
What are the benefits of being a long-term trader?
• Transaction costs - Let’s say that you are trading the GBP/USD currency pair and the spread is two pips. In order to make a profit of 500 pips, a long-term trader only has to make a trade that moves 502 pips. On the other hand, a short-term trader who makes 25 trades to generate the same amount of profit must make 550 pips since he has to overcome the two-pip spread for every trade.
• Longer-term traders can see trading opportunities that short-term traders cannot. Since a short-term trader focuses on only one or two currency pairs, they are not able to see general market conditions that would indicate trading opportunities they can take advantage of. But if you are holding a position for a longer time, when you see a trading opportunity you can benefit from it by adding to your holdings.
• You can manage your risk more effectively. When you are holding on to your positions for a longer time, you can more effectively manage them to reduce your risk. On the other hand, if you are holding a short-term position, you will have to set your stop-loss and take-profit orders in advance.
• It provides you with more flexibility. When you hold a position long-term, you don’t constantly need to monitor it. You can simply check on it at pre-determined intervals and then make adjustments as required. If you want to, you can do other things while still enjoying the benefits of being a forex trader. Or you can hold on to your day job and then manage your positions when you get home or on weekends.
• Having a long-term position allows you to more easily stick to your strategy. Since you are not constantly watching your trades, you won’t feel tempted to tinker with it when you see the market seeming to go against you.