BECKHAM
24-03-2013, 09:05 AM
Forex trading is a challenging business, with many different factors that can come into play at any given moment. Broadly speaking, there are two types of trading, long term and short term, and each has to deal with a different range of problems and issues.
Good traders not only know their markets very well, but they also know which type of trading they are best suited to, so one of the keys to becoming a good trader is to know whether you’re better in long term or short term markets.
Definitions
Short and long term trading are relatively loose terms. Short term trading generally applies to people who trade within each day, looking to make a lot of trades and earn quick returns on the hour to hour movements of the markets. Long term traders vary from day to day, to weeks, to even years.
Time Constraints
Short term trading is very labour intensive as you literally have to keep an eye on the market all the time. The smallest moves can imply a reverse or a new opportunity, and smart short term traders are always on hand to react accordingly.
Long term traders deliberately ignore day to day factors and look at the bigger picture. This is a lot less labour intensive, but doesn’t mean that you can just ignore your trade. Long term trading looks to secure profits on trends that last weeks or years, and is all about picking perfect entry and exit points.
Capital Constraints
Short term trading exposes the trader to greater risk because the more trades you make, the more you stand to lose on margins and financing charges, so the more you have to win in order to make a significant profit. However, because you’re looking to make a lot of small profits rather than one or two big ones, you can place less of your capital on a given trade.
Long term traders have to consider rollover charges and interest rates, as well as how their trade is performing. If there is a large differential between the buying and selling currency, long term traders can see their capital diminish significantly (or grow) by the time they decide to close their position.
Trading Tools
Short term traders are all about technical analysis and often have to develop an extensive knowledge of just about every technical indicator that is out there. There’s certainly a lot of trial and error involved in finding a set of indicators that work well. Fundamental analysis doesn’t work so well for short term traders because it doesn’t really come into play too often. Admittedly, short term traders must be aware of where they are trading in relation to broader trends and the overall situation of the markets so some fundamental analytical tools are required, but often this just involves paying attention to the nightly news.
Short term traders absolutely have to keep up to date with news and data releases such as Nonfarm for example, as these often produce short term lurches in the market that can make or break a days trading. Short term traders will often take early positions on data releases, or will know their market well enough to react to any secondary movements related to data or news.
Long term traders also have to look at technical analysis but place far more weight in fundamental factors like the long-term prospects of the economy, underlying stresses and interest rates, and even things like the political cycle. Long term traders are often extremely well versed in the history of their markets, what events have caused significant upheavals in the past, macro and how the markets signal that they’re about to reverse or exit a trend.
As mentioned above, long term traders also need to give a lot of thought to underlying interest rates and will know exactly when the monetary policy committees of central banks are due to meet.
Personality
Short term trading is pressurised and stressful, many of the guys you see on the floors of stock exchanges are short term traders (though there are millions of others who are sitting in slightly more relaxed environments). Short term traders need to be able to take a loss in their stride, they need to keep cool under pressure and make quick, firm, judgement calls. They also need to enjoy, rather than worry, about the fact that they are trading often more marginal calls. Finally, the best traders need to know when to get out, if the markets are volatile or ranging there is money to be made, but there’s also a chance of losing, so non-professional traders need to accept that sometimes you need to get out and go for a walk.
Long term traders don’t have to worry so much about day to day movements, and it’s a much less pressurised environment. However, long term traders have to have steady nerves and, like any trader, courage in their convictions. As long term traders deal with sustained market movements, it’s important not to get out of a position when a trend appears to be slowing down, it may just be a correction, and a trader who exits early will have committed the cardinal sin of ‘cutting profits and letting losses run’.
Conclusion
There are many phenomenally successful short term traders, and just as many phenomenally successful long term traders – of which Warren Buffett probably heads the field. There is no right or wrong method, the most important factor is which is better suited to you, not just your personality, but also the amount of time that you can devote to trading.
As mentioned above, most beginners start off with short term trading, dipping their toe in the water to get a feel for the mechanics of a platform or a trading system, but if this goes well, it would be a mistake to just try short term trading. You should have a go at long term trading as well before deciding which is truly better suited for you. Although it is often a cliché to say so, successful traders know how they react to certain situations just as well as they know how the market reacts.
Good traders not only know their markets very well, but they also know which type of trading they are best suited to, so one of the keys to becoming a good trader is to know whether you’re better in long term or short term markets.
Definitions
Short and long term trading are relatively loose terms. Short term trading generally applies to people who trade within each day, looking to make a lot of trades and earn quick returns on the hour to hour movements of the markets. Long term traders vary from day to day, to weeks, to even years.
Time Constraints
Short term trading is very labour intensive as you literally have to keep an eye on the market all the time. The smallest moves can imply a reverse or a new opportunity, and smart short term traders are always on hand to react accordingly.
Long term traders deliberately ignore day to day factors and look at the bigger picture. This is a lot less labour intensive, but doesn’t mean that you can just ignore your trade. Long term trading looks to secure profits on trends that last weeks or years, and is all about picking perfect entry and exit points.
Capital Constraints
Short term trading exposes the trader to greater risk because the more trades you make, the more you stand to lose on margins and financing charges, so the more you have to win in order to make a significant profit. However, because you’re looking to make a lot of small profits rather than one or two big ones, you can place less of your capital on a given trade.
Long term traders have to consider rollover charges and interest rates, as well as how their trade is performing. If there is a large differential between the buying and selling currency, long term traders can see their capital diminish significantly (or grow) by the time they decide to close their position.
Trading Tools
Short term traders are all about technical analysis and often have to develop an extensive knowledge of just about every technical indicator that is out there. There’s certainly a lot of trial and error involved in finding a set of indicators that work well. Fundamental analysis doesn’t work so well for short term traders because it doesn’t really come into play too often. Admittedly, short term traders must be aware of where they are trading in relation to broader trends and the overall situation of the markets so some fundamental analytical tools are required, but often this just involves paying attention to the nightly news.
Short term traders absolutely have to keep up to date with news and data releases such as Nonfarm for example, as these often produce short term lurches in the market that can make or break a days trading. Short term traders will often take early positions on data releases, or will know their market well enough to react to any secondary movements related to data or news.
Long term traders also have to look at technical analysis but place far more weight in fundamental factors like the long-term prospects of the economy, underlying stresses and interest rates, and even things like the political cycle. Long term traders are often extremely well versed in the history of their markets, what events have caused significant upheavals in the past, macro and how the markets signal that they’re about to reverse or exit a trend.
As mentioned above, long term traders also need to give a lot of thought to underlying interest rates and will know exactly when the monetary policy committees of central banks are due to meet.
Personality
Short term trading is pressurised and stressful, many of the guys you see on the floors of stock exchanges are short term traders (though there are millions of others who are sitting in slightly more relaxed environments). Short term traders need to be able to take a loss in their stride, they need to keep cool under pressure and make quick, firm, judgement calls. They also need to enjoy, rather than worry, about the fact that they are trading often more marginal calls. Finally, the best traders need to know when to get out, if the markets are volatile or ranging there is money to be made, but there’s also a chance of losing, so non-professional traders need to accept that sometimes you need to get out and go for a walk.
Long term traders don’t have to worry so much about day to day movements, and it’s a much less pressurised environment. However, long term traders have to have steady nerves and, like any trader, courage in their convictions. As long term traders deal with sustained market movements, it’s important not to get out of a position when a trend appears to be slowing down, it may just be a correction, and a trader who exits early will have committed the cardinal sin of ‘cutting profits and letting losses run’.
Conclusion
There are many phenomenally successful short term traders, and just as many phenomenally successful long term traders – of which Warren Buffett probably heads the field. There is no right or wrong method, the most important factor is which is better suited to you, not just your personality, but also the amount of time that you can devote to trading.
As mentioned above, most beginners start off with short term trading, dipping their toe in the water to get a feel for the mechanics of a platform or a trading system, but if this goes well, it would be a mistake to just try short term trading. You should have a go at long term trading as well before deciding which is truly better suited for you. Although it is often a cliché to say so, successful traders know how they react to certain situations just as well as they know how the market reacts.