Invest In Forex For The Long Term: Step By Step Guide
What Is Swing And Position Trading?
Long-term trading techniques are very effective for many forex traders. A long-term strategy, often known as "big picture" forex trading, is holding onto a transaction for a considerable time while considering all the variables that influence a currency pair.
There are two techniques for long-term trading, called swing and position trading. Swing trading is a type of trading that aims to profit from a stock's short- to medium-term growth. A position trader purchases and keeps an investment for a prolonged period in the hope that its value will increase.
Although they are pretty similar, there are some crucial differences, such as the time commitment and technical analysis required to carry out each efficiently.
Looking at 200 days moving Average, comparing relative interest rates, and comparing current exchange rates to PPP are some of the best long-term FX trading strategies illustrated in this guide.
One long-term position can be more successful with the correct preparation and execution than multiple short-term investments. Long-term transactions in the context of a forex strategy last for days, weeks, months, or even an entire year or more.
Due to the prolonged holding of a single position, this technique is occasionally referred to as positional trading.
Long-term trading tactics can be profitable, but they usually work best for people with a particular personality type who can be patient and forsake the thrill of short-term trading.
How does swing trading work?
Swing trading is a medium-term trading strategy employed by forex traders to capitalize on market fluctuations. When trading this way, you must have the patience to hold your positions for several days at a time. It is straightforward to accomplish this with proper risk management. Swing trading sits between day trading and position trading, two other popular approaches.
The four swing trading strategies!
Reversal Trading
To use this tactic, you must wait for the price to lose momentum. By recognizing specific patterns of price movement, which typically signify that the price is about to turn, you can identify reversals.
Forex Retracement
When examining charts, retracements or pullbacks are a typical feature of price action. The market moves in what we refer to as waves; there is a general direction that the asset travels in, but there are always pullbacks where price reverses but then continues in the initial path.
Retracements are a terrific way to start a swing trade because, if you can anticipate when and where a price retracement will occur, you may effectively acquire a temporary discount on your asset, maximizing earnings rather than merely joining the market.
Breakout Investing
The support and resistance idea is used in this technique to decide when to start a swing trade. If your fundamental study reveals a bullish outlook for the asset you wish to trade, you will start your technical analysis before entering the market. Your signal to enter the trade comes when the price breaks through a significant level of resistance with momentum.
Breakdown Investing
In essence, this is the complete reverse of the breakout technique; to confirm your bias, you must wait for a significant level of support to be broken before making a trade.
How does Position Trading Work?
The trading method with the most prolonged average holding period is position trading.
As a result, although the danger is more serious, so is the profit potential. History is replete with well-known instances of outstanding traders who achieved financial success by applying position trading tactics.
3 Position Trading Methodologies
Moving Average of 200 days
Utilizing 200-day Simple Moving Averages is one long-term Forex trading method (SMA). The average closing price over the past 200 trading days is used to calculate this indicator. It is mainly used to identify long-term market trends. Generally speaking, an uptrend is present when a currency pair continues to trade above its 200-day SMA. In contrast, the price is said to be in a downtrend if it continues to trade below this signal. The 200-day Simple Moving Average can also be used for another purpose: in uptrends, it acts as a significant support level, while in downtrends, it acts as a significant resistance level.
The 200-day SMA is frequently combined with other indicators, such as the 50-day SMA. One line crossing the other is typically interpreted as a sign of a changing trend.
Accordingly, the fundamentals of this long-term Forex trading strategy are as follows: Traders can search for currency pairs where moving average indicators show a clear trend and open positions to profit from it.
Purchasing Power Parities
Using Purchasing Power Parities (PPP) and comparing this indication with the current market exchange rates is one of the most well-known long-term trading methods in the Forex market. PPP is essentially the rate of exchange that will equalize the average price of goods and services between the two nations.
Therefore, if a country continually has lower inflation rates than other countries, its exports will become more affordable and alluring to overseas importers. The local currency is naturally in demand because foreigners must purchase it to access those goods and services.
As a result, currencies that trade below PPP levels are considered "undervalued," while those that trade beyond PPP are "overvalued."
The OECD uses extensive statistical data on the cost of products and services in various countries to calculate the Purchasing Power Parity. The Economist's Big Mac Index, which analyses the typical cost of this venerable burger in several nations, is primarily based on PPP. BMI essentially takes into account the cost of transportation, labour, rent, steak, cheese, and veggies. Although it is less complete than OECD data, it is at least simpler to understand and so more helpful for performing rapid calculations.
So how might PPP strategies be used for long-term FX trading? The trader looks for the currencies with the most potential for appreciation and places transactions according to those.
Elements to consider in long term trading
Relative Real Interest Rates
In essence, the real interest rate gauges how effectively deposits will retain their purchasing power in a specific currency. For instance, the Federal Funds Rate is now set between 0 and 0.25%. Meanwhile, the most recent US Consumer Price Index (CPI) shows a 1.5% increase.
Let's say a customer opens a £1,000 CD or deposit for a year that pays 0.25%. After a year, they will have earned £2.5 in nominal terms, but if inflation remains constant, the deposit will have lost 1.25% of its purchasing power (0.25% 1.5%). As a result, we can say that the real interest rate is 1.25%.
What about those central banks that have much lower interest rates? For instance, the Swiss National Bank maintains rates at -0.75%, yet the Swiss Franc has held its own against the GBP pretty well; compared to a year ago, it has increased by around 5%.
The nominal interest rate is one component of the equation, after all. The most recent Swiss Consumer Price Index showed a decrease of 0.5%. Therefore, CHF's actual interest rate is currently 0.25%. As a result, the fact that Swiss real interest rates are 1% higher than American real interest rates may contribute to Franc's strength.
It can be helpful to keep in mind that Central Banks cannot enforce negative nominal interest rates when it comes to long-term FX trading methods. The SNB's decision to lower rates to -0.75% does not guarantee that all investors and savers will be content to pay interest for the opportunity to hold Francs in their accounts. Some customers might want to withdraw cash and store it on current accounts or safes. As a result, for those individuals, the real interest rate for CHF would be 0.5% because the Franc is becoming more valuable due to a 0.5% decline in inflation. Calculating the actual interest rates of various currencies and opening long-term bets for those with higher real interest rates is the primary premise of this strategy.
Value
This is the most crucial and perhaps the most challenging step; we utilize fundamental analysis to assess the merits of a trading idea and establish its value.
The trade has a high value if the fundamentals are strong, and there is an excellent chance that our bias will be validated. The value of that trade lowers if the fundamentals are not as favourable or perhaps even just neutral, and we add those trades to a watch list to monitor how the fundamentals evolve.
Optimize
The second step is optimization, in which we choose a workable place of entry for each trade using indicators and chart patterns as a timing tool. Here, technical analysis assumes a prominent role in the expert analysis since it offers a safe entry point into the market, enabling us to proceed to step 3 with confidence in our bias.
Avoiding or Reducing Rollover Fees
Due to borrowing costs and interest rate differentials, brokers charge clients rollover fees for keeping the majority of Forex trades open overnight. The broker may also give the client a small interest payment in some transactions. The rates set by the central bank play a significant role in this.
Assume, for instance, that a trader is looking to open a position while researching the EUR/RUB pair. The Bank of Russia is keeping onto its 6% interest rate as of April 2020, while the European Central Bank is still maintaining its benchmark interest rate at 0%. Since Russia currently has a higher-yielding currency, a broker would pay a client £5 for holding a £100,000 overnight short position on EUR/RUB.
There are no issues with keeping onto short EUR/RUB positions for a longer time frame if a trader examines the most recent charts and determines that the Ruble may increase against the Euro. In fact, by doing this, traders can make £150 every month.
But what happens if the situation is reversed? What if the Russian Ruble is rising against the Euro? A broker might charge a client £25 to keep a long £100,000 EUR/RUB position overnight due to adverse interest rate differentials. Now, this money might not be a significant one. However, it is helpful to remember that such costs will eventually add to more substantial amounts when it comes to a long-term Forex strategy. At this pace, rollover fees may total £2,250 in three months.
Therefore, while traders may be able to spot solid trends for long-term trading, hefty rollover fees can drastically cut down their potential winnings. How, therefore, might we address this problem?
Shopping around is the first obvious remedy to this issue. There are numerous Forex brokers with more affordable rates, which results in cheaper rollover fees. As a result, traders may be able to make hundreds of pounds in savings on their long-term positions. Some of them also provide accounts that don't charge a rollover cost in return for a tiny flat fee or broader spreads. Therefore, there are numerous ways to cut those kinds of costs.
Trading forex for an extended period of time has advantages. It may fit some traders more than others because it is also a different experience from short-term trading. You can use this knowledge to decide whether or not you want to undertake long-term trading now that you are familiar with its fundamentals. Some of it might be a helpful addition to your current trading strategy if you're an experienced long-term trader.
FAQs about long term trading
How can I tell if my forex trading plan will be successful over the long haul?
Since it is impossible to foretell the future, there is practically nothing that can be known in the long run. Running a plan through demo accounts and then consistently tracking the results is the greatest approach to determine how effectively it is going to perform.
What is forex long-term trading?
Holding on to your preferred currencies for a considerable amount of time is the process of long-term trading. This could range from a few weeks to many years.
Is forex intended for day trading or swing trading?
Generally speaking, forex is better suited for short-term trading, but long-term trading is still doable.
How profitable is a long-term forex trading investment?
Like anything else, long-term investing can be pretty beneficial. However, this does not imply that there are no risks involved, and you should never invest more money than you can afford to lose.
Is there a buy-and-hold approach to forex trading?
Yes. With forex, you can keep your position for as long as you choose. This will be a relatively brief moment for many people. Others may have to wait months or even years.
What amount of capital is required for sustained forex trading?
There is no set minimum amount. It is subject to each broker's rules. The broker will typically specify the minimum, which is frequently £500. Always make sure you have the capital necessary to support your chosen trading strategy, but never take on more risk than you can bear.
In the long-term, can you grow from a hundred pounds trading forex? Theoretically, yes, If your trades are successful, you can make any amount of money increase. Still, you should constantly keep in mind that there is just as much possibility for loss as there is for development.