How to plan a long term trading strategy in Forex

Strategy for long term fx trading requires a significant amount of data and is less dependent on technical analysis. When trading long term, fundamentals play a major role in determining trade direction and technical analysis is used for finding the best entries and exits.

Long term trading in any asset class, especially in forex, requires determining major price catalysts and anticipating long term trends as they form on the market.

This article will look at long-term forex trading, as well as the advantages and drawbacks of implementing such strategies.

Core features of long term Forex trading strategy

• FX trading long term strategy involves fundamental analysis of the currencies making up a pair
• Such trading strategies are most suitable for major pairs, as a lot of readily available data is easily accessible for traders dealing with major pairs
• The returns of such strategies depends on macroeconomic factors more so than technical indicators
• Weekly charts are most often used in analyzing prices in the long run
• Due to infrequent order placements, long-term traders are often highly leveraged and have weekly/monthly/annual performance objectives
• Interest rates and swap charged by forex brokers are important considerations for long term traders who hold open positions for weeks at a time

How does long term forex trading work?

The factors required for conducting a successful trading strategy vary based on timeframe. Trades that are a few hours apart will inevitably be determined by short term trends and technical indicators. Long term trading can be a more relaxed experience with fewer variables in the short term, but it also requires considerable discipline to maintain composure and not offset your strategy by reacting to short term fluctuations.

Markets are constantly moving, and long term price trends are often characterized by retracements and short term volatility.

Long term price events to consider

A number of important events and news releases can affect exchange rates on the market, such as:

• CPI and inflation data that affect consumer behavior
• Interest rates and monetary policy updates from central banks
• Trade statistics between the two countries whose currencies make up a pair
• GDP updates and periodic economic publications from government officials
• Major legislative changes that can affect the economy of a country
• Consumer sentiment reports and spending patterns

Interest rates

One factor that cannot be overlooked when trading forex in the long run, is the interest rate. The rates set by the issuing bodies of currencies can affect the decision-making of long term traders. Most forex brokers charge overnight rollover fees that are derived from interest rates. If a country has a positive interest rate, holding positions in that currency will actually add value to the portfolio, although the amount is unlikely to be substantial.

Changing interest rates also signal the central banks’ strategy in combating inflation. For example, the Bank of Japan and the Federal Reserve of the US would react to the same inflation figures differently, due to differences in CPI, fiscal and monetary policies and many other factors.

Increased inflation makes central banks limit money supply in the market by increasing interest rates. Every long term strategy forex traders use is based on taking into account fundamentals. And interest rate decisions are one of the most important factors in fundamental analysis.

Fundamental analysis

Conducting a fundamental analysis of both base and quote currencies in a pair is essential for long term forex trading. Knowing the factors at play and the metrics that shape the decision-making of millions of traders can prove to be the difference between profits and losses.

Economic calendars with significant official meetings and press releases marked on them are a part of many traders’ arsenals – and with good reason. Keeping track of the news is not an easy task, and narrowing your search down to essential events can save a lot of time and effort.

The long term price events listed in the first section are all part of fundamental analysis and always affect exchange rates to some extent.

Technical indicators

While long term trading is more focused on fundamental analysis, this does not mean that it neglects technical analysis altogether. Long term trends can still be identified by technical indicators, but they need more raw data to function properly and provide an accurate picture for traders. The purpose of technical analysis is slightly different in long term trading. While short term trades fully depend on technical indicators to determine the profitability of a position and enter the market at a correct time, long term trading is less stringent on the degree of technical analysis required. A trader may slightly misjudge the entry point, but if their long term expectations are correct, this will not seem as much of an issue.

The usual technical indicators, such as moving averages, Fibonacci levels and Bollinger bands are also effective for long term traders. The difference being in the amount of data traders have to work with and the visual representation of trend formations on weekly and monthly price charts.

Most fundamental traders use economic and political announcements to get clues about where prices might go next, and they use technical indicators to find the best entries and exits.

Weekly charts

The most effective tool for long term forex traders is a weekly chart. Such charts show clear signs of trend formations and are helpful in identifying retracements and support/resistance points. Long term trading can be a testing experience and weeks can pass without much price action, which can prompt some impatient traders to open new positions just for the sake of novelty.

Keeping track of weekly charts can help find mistakes early, before incurring major losses, and traders can benefit from the added flexibility and make necessary adjustments.

Trading in long intervals involves keeping track of everything that happens on the market. Furthermore, weekly charts are helpful when traders need to narrow down their trade intervals by focusing on a shorter time frame, which makes it easier to identify pressure points on a chart and the events that caused significant price action.

A good example of this is the weekly chart of GBP/USD. The chart provides sufficient data to identify entry and exit points for profitable positions, as well as the release of inflation data that can shift the pair to either side.

Pros and cons of long term forex trading strategy

Pros

• Less stress – long-term trading does not require traders to be present and constantly monitor their positions
• Real world data – long-term positions and their profitability is determined by macroeconomic factors affecting the currencies that make up a pair, which grants access to multiple sources of official data published by central banks and government agencies
• Time-saving – placing orders and executing trades takes very little time, which means traders are in and out of the market within minutes
• Diversity – traders who choose longer timeframes can easily manage multiple open positions and make adjustments whenever necessary

Cons

• Dependence on leverage – long term traders do not place orders frequently, which can mean that their trading sizes are larger and more calculated. For larger positions, more capital is needed.
• Rollover fees – many forex brokers charge rollover fees for position held overnight, however, in some cases this can be positive
• Less flexibility – following a strict long term strategy can lead to missed opportunities in the short term
• Requires research – going through the factors that can affect exchange rates in the long run can be a time-consuming process
• Trading long term strategy in Forex requires understanding of how economies work, correlation between economies and commodity prices, learning about different policies and central banks’ role is critical.

Forex long term trading strategy example

To better understand the process of long term forex trading, we can consider the example of GBP/USD since the start of 2022 to identify the events that would have been important for long term bulls and bears of the pair.

The YTD chart of GBP/USD clearly shows a gradual decline of the pound against the dollar. Long term traders that were bearish on the pair would have highlighted key issues affecting the pound, such as the energy and humanitarian crisis caused by the war between Russia and Ukraine. In addition, inflationary pressures that weighed heavily on virtually all currencies. While bulls could easily identify an entry point at the start of October, which saw the pair dip to historic lows. Both positive and negative news have the potential to skew markets beyond reasonable levels, which presents opportunities for new traders to enter the market and open profitable positions.

FAQs on long term Forex trading strategies

What are the benefits of Forex long term trading strategy?

Trading forex in the long term can give traders the opportunity to anticipate trends as they are forming, to structure their trades accordingly. Long term trading involves significantly less stress, and traders can open and close positions with relative ease.

Does Forex long term trading strategy actually work?

Long term Forex trading can work when implemented well. The importance of research cannot be understated. Being on top of the news and important updates can help identify entry and exit points and lead to improved performance in the long run. Long term returns can vary based on leverage, trade frequency and strategy used by traders.

How long is a Forex long term trading strategy?

Long term Forex strategies can range from weekly trades to holding open positions over months at a time. The key difference is the scope of the trading strategy, which determines the frequency and duration of open positions held by traders.