In the financial market, just like all other types of trading, to buy a currency pair long means that you’re expecting the price to appreciate. The opposite is shorting, when you predict a price to drop.
When you conduct forex trade, you are speculating on both the increase and decrease in the currency’s value.
Because currencies are traded in pairs, going long, in other words, means that you believe that the base currency is expected to appreciate in value. At the same time, you believe the quote currency will collapse in value. Technically, this means that for every FX transaction you execute, you go “long” on one currency and “short” on the other.
With a long position in FX trading, if your hypothesis proves to be true and the underlying currency’s value rises, you can get out of your trade and get a profit by exiting at the current market price.
A long position may not always entail purchasing an underlying asset. Derivatives make it possible for traders to speculate on the market without owning the assets.
Why go long in Forex?
Technical and fundamental market changes can contribute to the decisions traders make to buy and keep their currencies in long positions.
- A good first step is to research macroeconomic factors influencing the currency.
- Traders use technical analysis to base their setups on the concepts such as support, resistance, etc.
- There are trend traders who believe in the ability of momentum to influence the price action. They persist in following a particular price trajectory in the hope that their investment will benefit from a trend that has a long-term projection.
Strategies for long term Forex trading
1. 200-day Moving Average
The 200 SMA indicator was developed using the mean closing prices of the 200 most recent days of trading. The main purpose of using it is to identify long-term market patterns. In the majority of instances, an uptrend is determined when the currency pair stays above the 200-day SMA. On the flip side, if the price stays under the MA, the market is in a downtrend.
It serves as a significant support level while the trend is going up and as a major resistance level when the trend is going down.
Many traders pair the 200-day SMA with other popular trading tools like the 50-day SMA. It is seen as a sign of the shift in trend when one line crosses over another.
Long-term trading in the forex market primarily involves identifying currencies that have an obvious up or downtrend (as judged by the 200 and 50 MA Indicators) and taking advantage of those trends.
2. Purchasing Power Parity (PPP)
Purchasing Power Parities (PPP) can be used to form a long-term trading strategy in which PPP is compared to current exchange rates. In this strategy, the weighted prices of products and services between two nations are standardized by exchange rate differentials.
So, when one country has lower inflation rates than its counterparts, its exports will gain an advantage due to their favorable prices and thus will have an increased demand from foreigners. This leads to a need for the local currency because outsiders will need it to buy goods and services from there.
This approach results in the classification of currencies as either “overvalued ” or “undervalued,” depending on how far or how close they are to their PPP levels. Basically, traders using a PPP trading strategy focus on finding the most undervalued currencies and then placing bets based on their ability to appreciate.
3. Set profit targets and stop losses
A profit target is an amount a trader wishes to make in a given trade and is typically specified beforehand. A stop-loss order is used to limit a possible loss if the market goes against a trader.
The bounds these limits set create realistic constraints that stop disastrous losses resulting from the risk-taking behavior known as emotion-based trading. Investing in volatile markets may be quite exciting; it’s hard to remain unemotional when markets rise and decline rapidly. But investors who try to time their bets chasing market swings may lose everything in a sudden crash.
4. Cushion yourself against rollover fees
Brokers charge rollover fees on most Forex positions, which clients must pay in addition to the exchange’s interest rates because of the spread between borrowing and lending rates. When it comes to some trades, the broker will foot the bill. Therefore, it is essential that you compare different brokers based on not only their spreads but also how they execute their rollover fees.
So, it’s possible for traders to pick out promising long-term investment patterns, but due to the large turnover fees, their prospective returns are considerably limited. What actions may we take to alleviate this?
Shifting gears and finding a better option is the obvious solution to this dilemma. Traders can potentially save hundreds of dollars each month on their long-term positions thanks to better-priced forex brokers and their corresponding lower rollover charges. Rollover free accounts are available, albeit they often require a flat price or bigger spreads as payment.
The general meaning of “long” in the context of trading is buying an asset with the hope that its value will appreciate. In the context of a currency pair, it means that you expect the base currency to appreciate against the quote. It helps a lot when deciding on whether to go long, to be backed by solid fundamental proof or technical analysis. If applied correctly, the strategies discussed above are essential to succeeding in taking a long position as a trader.