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Trading Short-Term As Opposed To Long-Term

FOREX Trading Strategies

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Many new ones flock to trading currencies each year in the hopes of making a better life financially. The lure of making large amounts of money in a short period of time has a mass appeal, which is evident by the large number of Lotteries today.


The major difference between the Lottery and trading is that you have full control of your results. Depending on your knowledge and experience, your psychological makeup and the ability to adapt and make changes in both attitude and procedure, you can win big many times in trading while having better odds dying in a car accident than ever winning in a Lottery.

Because many first enter trading in the hopes of making a big killing, this mindset often gets the new or inexperienced trader in early trouble. It is easy to get discouraged early on in trading if having to experience many losses in search of that big win. More often than not, those losses result in an early exit from trading altogether.

Psychological changes take place within the traders mind when faced with mounting losses. The power of fear starts to take a greater part in the decision process, usually resulting in making decisions that are faulty for success. Where greed was the major motivator for chasing the hope of making a big killing in the markets, fear becomes the greatest impedance to proper execution, thus damaging any chances of recovery.

Now, there is much we can talk about when it comes to Fear and Greed, Trading and Gambling, and the psychology behind the actions we take in relation to these subjects. But this article is going to address something that many new and inexperienced traders fail to consider, the proper view of short or long-term trading.

To make large profits in a single trade requires taking a long-term view of trading. Unless the market makes incredible, above average daily moves within consecutive days, it will usually require staying in a trade for more than a couple of weeks to capture what most of use would consider a big move. When staying in a trade for at least a few weeks, this kind of trading is considered ‘long-term’.

To catch big moves as a long-term trader requires sitting pact while a market may correct against your position. The probability is extremely high that it will do this often in the course of your trade. Many are unable to sit by and watch 50% of their paper profits evaporate due to a correction, and this is why for many new and inexperienced traders, long-term trading may not be suitable.

Looking solely to make the big trade will result in entering more losing trades than winners, as many trades that initially (for the short-term) entered into profit soon become losses as the long-term trader allows for corrections that may actually stop out the trade, something that happens often. Although much money can be made trading long-term, for many traders, the number of losses as opposed to the few big wins can be discouraging and psychologically damaging when it comes to profiting consistency in trading.

How many times have you been in a trade that was in good profit, say a few hundred (single contract), but did not take the profit because you wanted a much bigger piece of the pie? Now, how many times of doing this have you found your profits eroded, or completely wiped out and losses mounted instead? If you are like most traders, the answer would be that you have seen good profits disappear and losses appear many times. What could be more frustrating and devastating to the developing trader than this?

The purpose of this article is to suggest that taking many smaller profits as opposed to a few big ones may be healthier to your mind and account. By looking to take quicker, smaller profits, you can increase the frequency of your profit taking and decrease the frequency of taking losses. Additionally, short-term trading when properly executed can result in those losses being smaller in size as well. When a trader wins more times than not, this is a positive affirmation for the mind, as well as very healthy for the account.

Now, my discussing short-term trading should not be viewed as a promotion to day-trading, a completely different trading mindset altogether. Day-trading is somewhat like pseudo-scalping, where you are looking to capture a few points this way and that within a single day, and not hold any positions overnight. Short-term trading falls under the category of holding on a position for more than a single day, but less than 3 weeks.

If you have a good entry method, you can take advantage of short-term profits by practicing a good exit method that is geared toward exiting your trades in the short-term. The short-term trader will want to take the first opportunity to move his or her stop-loss to a point where the trade would be breakeven if the stop-loss order were to be filled. Corrections will often stop out a short-term trader who is aggressively moving up his or her stop-loss order each day, but often times getting stopped out would mean taking a very small loss, no loss, or profits small or large. Not taking big losses, or no losses, or small profits is much better than taking on big losses. Winning many small to medium profit trades is so much better to many than winning one big trade very so often.

Supposing you enter a trade using a good timing method, the odds should be in your favor to capture a nice profit of a few hundred or so within a week’s time or less. With this in mind, an aggressive stop-loss should be deployed that would protect your short-term profits quickly before any correction were to erode it.

Assuming you entered your trade initially from the end of a recent trend correction, you may wish to consider moving your stop-loss to breakeven once price closes above it by the amount of an average trading range. Or you may create a small trend line below the lows (long trades) or above the highs (short trades) as your stop-loss guide, placing it a few ticks below or above the line depending on whether you are long or short.

Some may allow one correction against their position if it does not exceed 50% of the range from the correction low or high that your trade entry was based on. After such a correction is formed and price resumes (in the direction you obviously want it to go), you can then use that correction as part of your trend line angle for stop-loss guidance. This would result in a much longer trade usually, than the more aggressive approach mentioned earlier.

Of course, knowing your market can really help. Does it trade in wild and large swings normally, or trends nicely allowing for a good estimation of support and resistance? If you are trading a large swinging volatile market, then you know your trades will probably last only a day or so before the next correction and would want to be really aggressive in your stop-loss placement strategy. For the less volatile markets, you can be less aggressive in your stop-loss strategy but at the same time still keep a short-term objective.

If your initial risk is $300, for example (say you are trading the grains), and your trade is now $200 or more, you may wish to consider moving to breakeven or tighter, depending on any additional information you may have such as nearby support or resistance. In other words, if you are long and price has closed above what you consider strong support (trend line, previous tops or bottoms, etc.), you may consider moving your stop-loss a few ticks just below such support, even if it means the possibility of getting stopped out with just $150 profit on that single contract. It is much better to gain 50% on your money risked, than to lose 100% of your money risked with nothing to show for your time. If your trading wins are better than 60% as opposed to trading losses (you win more times than lose because you are aggressive in capturing profits, regardless of size), and the times you lose normally occur after you’ve moved up your stop-loss aggressively so that if stopped out you are at breakeven or at a very small loss, your money can then appreciate. It may do so slowly, but the object of this business is to have at year’s end more money than you started with. For many trying to catch the big moves, and during this attempt is taking on a lot of big losses, appreciation of capital may be non-existent.

Do yourself a favor and go back over all the trades you have made up to this point. I’m assuming you take good notes of each trade you have ever taken. If not, that is a problem you need to fix first now. Note how many profitable trades got away from you because you didn’t want to miss that bigger move if you tightened your stop-loss, only to result in your initial stop-loss (the greater amount to lose in your planned trade) getting hit before the market moved your way. How many of those do you suppose you could have taken a profit, small or big, had you been a bit more aggressive in moving up your stop-loss? How many big losses do you think you could have made smaller, or even broke-even, if you were a bit more aggressive on your stop-loss placement?

Lowering your risk exposure (smaller or no losses) and increasing the frequency of profit taking can help many traders turn things around in their trading. It can give the trader a sense of control over the trading process, an increase in confidence. There are many benefits to taking the short-term approach as opposed to the long-term approach.

As your frequency of wins over losses increase, and your experience continues to grow (a side-effect to still being in this business rather than wiped out), you can explore the possibility of capturing the large moves if you like. It is best you do this as an experienced, profitable trader, than one who is just trying to win it all at one time without a clue as to the damage it is really causing you.

Never let anyone tell you that long-term trading is better for you than short-term trading. It may be better for that individual (and then again, maybe not), but you need to start profiting on a consistent basis before taking on fairly large risks.

But do not take my word for it. As already suggested, just reflect back on all your prior trades and how they resulted in either profit or loss. Note where you are right now. If what you see within your own records show that your account and mental state would have been much better right now had you taken the short-term approach, then you have your answer right there.

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About the Author
Rick J. Ratchford is President of ProfitMax Trading Inc. He is a full-time commodity trader for his own account as well as assisting other traders. He has been a computer programmer for more than 20 years and a trader since 1990.

More in this category: « Managing Your Trade