Short term forex trading can be highly stressful if done over a long period of time, as you've probably discovered if you have any experience of forex trading. You need quick fingers to trade in and out of positions and you need to make decisions quickly regarding entries and exits. You also are often faced with requotes from your broker and will often come under close scrutiny if you place a lot of short term trades with them that only last a few minutes.
Overall it is quite a stressful occupation which is why long term forex trading generally makes a lot more sense. Even if you only trade the 1 hour or 4 hour charts, you will find a noticeable difference in the amount of time you have to make trading decisions, not to mention the reliability of the technical indicators you use.
If you really want to take it one step further you can trade the very long term charts such as the daily, weekly and monthly charts. This style of trading is ideally suited to people who want to trade forex but maybe have a full-time job so don't have the time to sit in front of a computer and monitor their positions all day.
All you need to do is wait for the right set-up to occur, enter your position and watch it unfold. Each position can last days, weeks or even months, but at least you only have to look in at the end of each day to monitor your position, and if your trading call is correct you can potentially make several thousand points profit.
As an example take a look at the monthly chart of the EUR/USD currency pair. If you used a simple EMA crossover system such as the EMA (5) crossing the EMA (20), you could have entered a long position on the last crossover (in 2006) at around 1.2500 and at the time of writing would be over 3000 points in profit.
You can look at other currency pairs and see similar results so it's clear that long term forex trading can be equally as profitable as short term trading, if not more so. It's also a lot less stressful and time-consuming. So if you're struggling to make consistent profits from short term trading try increasing the time frame of the charts you are using, and you may well notice a big improvement in your results.
Both short term trading and long term trading can be effective trading strategies, however, long term trading has several significant advantages. These include the effect of compounding, the opportunity to earn from dividends, reduction of the impact of price fluctuations, the ability to make corrections in a more timely manner, less time spent monitoring stocks.
1. Compounding
Time can be investor’s best friend because it gives compounding time to work its magic. Compounding is the mathematical process where interest on your money in turn earns interest and is added to your principal.
2. Dividends
Holding a stock to take advantage of payouts from dividends is another way to increase the value of an investment. Some companies offer the ability to reinvest dividends with additional share purchases thereby increasing the overall value of your investment. Additionally, dividends are more a reflection of a company's overall business strategy and success than volatile price fluctuations based on market emotions.
3. Reduction Of The Impact Of Price Fluctuations
In the long term investment the persons is less affected by short term volatility. The market tends to address all factors that keep changing in the short term. So a person involved in long term investment or trading will not be affected as much by short term instability due to factors such as liquidity, fancy of a particular sector or stock which may make the price of a stock over or undervalued. In the long term, good stocks which may have been affected due to some other factors (in the short term) will give better than average returns.
Long-term investors, particularly those who invest in a diversified portfolio, can ride out down markets without dramatically affecting his or her ability to reach their goals.
4. Making Corrections
It is highly likely that you could achieve a constant return over a long period. The reality is that there will be times when your investments earn less and other times when you make a lot of money in short term. There may also be times when you lose money in short term but as you are in quality stocks and have long perspective of investment you will earn good returns over a period of time.
There are always times when some stocks do not perform and it is the wise choice to pull out of an investment. With a long term perspective based on quality stocks, it is easier to make decisions to change in a more timely manner without the urgency that accompanies short term and day trading strategies chasing volatile changes.
Investors that begin early and stay in the market have a much better chance of riding out the bad times and capitalizing on the periods when the market is rising by taking a longer term view using long term trading strategies.
Both James Woolley & Mark Crisp are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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