From Robin Lofton,
Your Guide to Forex Trading.
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Long-Term Trading in the Forex Market

Long-term trading in the Forex market is very similar to investing in the stock market. Long-term traders will hold an open position for weeks or months. They have even been known to hold a position open for years though this is less common. Long-term traders seek to profit from major price movements that result from macroeconomic factors. This is very similar to the “buy and hold” strategy of a stock investor.

Long-term Trading Versus Investing

Yet there are very significant differences between a long-term currency trader and an investor. First, a long-term currency trader can hold a short (or sell) position that can be held for a long period of time. An investor will typically hold a long (or buy) position over the long-term. Investing is generally considered to be a less risky strategy because the overall position in the market is expected to rise. The short-term price fluctuations are not considered significant because the investor is holding the position open for a longer term. However, long-term currency trading makes the trader vulnerable to price fluctuations and adverse short-term price movements. This type of volatility exposure can place pressure on margin accounts.

Most retail (or individual) traders in the Forex market do not hold positions for weeks or months. Indeed, most Forex traders engage in swing trading while a few will engage in day trading. Long-term traders are typically hedge funds or other large financial institutions with enormous reserves of cash. However, individuals can participate in the Forex market as long-term traders. There is no restriction. They simply need to practice risk management tools to protect their margin account from the market’s volatility.

Two Guidelines for Long-term Trading

Long-term (or macroeconomic) traders focus on making large profits from major currency price trends. These trends are usually the result of macroeconomic cycles or tendencies of a particular currency or currency pair. Finding trends that last for the long-term can be slightly trickier than identifying the short-term price movements sought by swing traders or the minute pip movements desired by day traders. However, this higher degree of difficulty can lead to higher profits, which is the goal of long-term traders.

Long-term traders rely on cycles to forecast currency price movements.

• Interest rate cycles
  

  Where do you think that interest rates are headed in the United States, Canada, or Japan? What is the Bank of England’s plan for coming the year? Is the European Central Bank worried about inflation? These are issues that long-term traders need to consider in their analysis of interest rates.

  But that is only part of the examination. Since currencies are always traded in pairs, the long-term trader needs to analyze the relative interest rates of the two currencies. A narrow interest rate differential is bullish for the currency with the lower interest rate. A wider deferential tends to increase the demand for the higher yielding currency.

• Economic Growth Cycles
  

  What is the growth outlook for the United States, Switzerland, or the United Kingdom? Which economies are expanding? Which countries are experiencing or headed towards a recession? Long-term traders rely on many different economic reports and indicators to determine the level and prospects for growth in a particular economy.

  An economy that is expanding is likely to experience higher interest rates. This is bullish for the currency. An economy that is slowing down or contracting would probably have lower interest rates. Low interest rates are bearish for the currency.

  These are the two major factors in the macroeconomic cycle. Of course, many other factors would also be important such as the policies towards a particular currency. Do international organizations think the currency is overvalued? Is the G7 or national governments complaining that a currency is undervalued? What are global trading powers saying about the currencies? These policies can affect the demand for a currency.

  Is long-term trading right for you?

  Does this style of trading that requires patience and a deep understanding of the global marketplace appeal to you? If you are more of an investor who likes the buy-and-hold strategy, then long-term trading could be your style of choice. It is certainly less time-intensive than day trading or swing trading. Many traders consider it less exciting. However, with hedge fund managers and “big money” focusing their best efforts in long-term trading, the profits must be worth the effort, patience, and research.

  Remember that this approach can be combined with other styles. Swing trading and long-term trading are definitely compatible styles that allow the trader to secure quick profits by short-term price movements while profiting from the long-term outlook of a currency.