In FX, we classify traders into four groups: scalpers, day traders, swing traders, and position traders. The latter two are often regarded as forex trading long term, but position trading takes it to the extreme.
This strategy is a buy-and-hold approach for trading FX markets. However, position traders capitalise on reversal patterns or any other situation to hold their position for months or more.
Let’s look at position trading in more detail.
What is position trading?
Position trading is a strategy where long term forex traders hold their position for months or sometimes years. It’s an approach of taking advantage of ‘big moves’ by exploiting multi-month and multi-year market movements.
Here, the price moves a considerable distance from their entry, and, as a result, forex trading long term can yield more profit. Position traders study higher time frames, namely daily, weekly, and monthly charts.
A typical position trader will only execute up to 10 orders in a year. This is in stark contrast to traders like scalpers and day traders, who usually open tens of positions daily. The lower rate of participation results in reduced transaction costs.
Position trading means you can watch all pairs, even exotic ones with higher spreads. Another benefit of forex trading long term is that you are less concerned with intraday price movements. Instead, you focus on the big picture of where the market will likely be in a month, six months or year’s time.
Position trading requires special predictive study, combining technical and fundamental analysis. The latter tends to be more significant for a long term forex trading strategy.
This is because of intrinsic value, the concept of deriving the true value of an asset through complex studies.
Naturally, technical analysis shows us the current market price. However, long term forex trading through fundamentals looks to go deeper by searching if that price is overvalued or undervalued.
The most significant fundamental indicator in forex is interest rates. These usually affect the economic growth in a country based on the level of inflation and borrowing. This is, of course, reflected in the currency.
The general trend is higher rates result in a stronger currency due to slower inflation (but lower economic growth). On the other hand, lower rates often produce a weaker currency because of faster inflation (but economic stimulation).
(Later on, we will cover a long term trading forex strategy to make money from interest rate swaps).
Interest rates are not only the economic indicator observed by position traders. The point is that these individuals study the underlying factors of price movements that we don’t see with chart patterns or indicators.
Long term trading strategies for position trading
We’ll now cover the popular strategies when long term position trading forex.
Riding trends is the name of the game with any strategy. It is no different when forex trading long term. The advantage is that you can implement further confirmation with fundamentals. Generally, the first step to identifying a trend is using an indicator, most commonly a moving average (MA).
The MA is a simple technical tool. Traders simply observe where the price is relative to the moving average. We consider the trend bullish when the market is above the MA while bearish when it’s below it.
Some position traders place an additional moving average to create a crossover long term forex trading system. The periods used in this scenario tend to be 100 and 200 or 50 and 200.
For our AUD/JPY example, we’ll also consider the interest rate climate at the time of the trade (2021). Japan’s central bank has maintained a negative interest of -0.1% since 2016.
On the other hand, the Reserve Bank of Australia’s interest rate was, on average, 0.1% in 2021. Investors assumed a stronger Australian dollar (AUD) compared to a weaker Japanese yen (JPY) as a result. So this meant looking for long opportunities on this pair in a long term trading strategy.
The chart below shows the price retraced to the two MAs twice, creating support each time. The bullish green candles which closed above were confirmation of buying strength. These would have been entry triggers.
We can see that the price rallied about 1700 pips from August 2021 to September 2022.
When forex trading long term, there are many ways to capitalise on reversals. You can combine technical and fundamental analysis, as in our last example.
Alternatively, you can use pure price action and support & resistance, which is what we’ll do here.
Let’s look at the daily chart of USD/CHF. We see a pin bar at the resistance zone. Here, you may have chosen to enter after the close of this candle or waited for a 50% Fibonacci retracement.
This resulted in a near 1000-pip downtrend for two months, another demonstration of a powerful forex long term strategy.
Profiting from accumulative overnight swaps or interest is another way of forex trading long term. A carry trade is a neutral strategy where investors sell a currency with a lower interest rate against one with a higher interest rate.
The differential offers a positive swap that your broker credits for each night you keep your position open. The interest can add up pretty quickly when you hold for an extended period. The carry trade is not the best long term forex trading strategy for everyone.
Firstly, you need a large-size stop loss to withstand intraday fluctuations that can last for days or weeks. A wider stop results in a lower position size, leading to the second problem. You will need to invest more capital to see a decent profit.
Yet, carry trading can yield great results if you’re trading in the right direction. For instance, the AUD/JPY position would have been a good example. This is because AUD’s interest rate was higher than that of JPY.
Pros and cons of forex trading long term
Let’s look at the main benefits and drawbacks of practising in long term trading strategies.
- Position trading is the least time-consuming forex strategy. By spending less time on the charts, you can maintain a profitable account and engage in other activities like a full-time job.
- Forex trading long term allows you to reap the maximum potential of a move or trend. Price can take a long time before moving in an extended and favorable direction.
- Carry trading can offer passive interest or be an additional strategy for making profits. On the flipside, you can incur negative swaps in some instances.
- Position trading requires substantial patience, a trait that only a few traders have.
- The opportunities with any long term trading strategy are pretty limited. So, you may go for weeks without placing a single position.
- Position trading has an opportunity cost because money is tied up for too long on one trade. Similarly, you generally need more equity or capital to make a decent profit.
- Your stop loss often needs to be wider, considering the amount of time you plan to spend holding.
Although forex trading longer term has enticing benefits, it’s an approach more preferable to those with some years of experience. Swing trading is the next best thing, striking a balance between position and day trading.