The foreign exchange market, or forex, is a marketplace for global currencies. The importance of such a space is paramount for international commerce given that each country has a currency for business transactions. Such needs make forex the largest and most liquid global financial market. Since there is no central marketplace, the foreign exchange market is a non-centralized set of activities that conduct over-the-counter (OTC) electronic transactions and is open and available 24 hours a day for five and a half days a week. This expanded time frame over every time zones allows traders to engage in transaction regardless of where they are located. Currently, there are many trading strategies for buying and selling currencies in a profitable manner.
Among the many strategies that traders can use, position trading involves holding positions in the long-term, including weeks, months, and years. Behind this type of trade is the idea that the currency will increase in value with time. Generally, traders take a macroeconomic view and conduct these trades based on the growth potential of a currency. Success in such a strategy depends on a multitude of factors, including the entry point or purchase price of the currency. According to some experts, the entry price of a trade in position trading is made using fundamental analysis and sometimes refined or backed up by technical analysis.
For example, a great positional strategy involves the 50- and 200-day exponential moving averages (EMA). A bull market is depicted when the 50-day moving average line crosses the 200-day moving average line. This action is known as a golden cross. The reverse is true for a bear market. Combining technical indicators between these averages and Stochastic RSI indicators creates the perfect set of information needed for highly productive position trading. These indicators provide insight as to the possible conditions that signal an adequate scenario for buying or selling.
Advantages and Disadvantages
Holding positions in the long term provides traders with a set of advantages. Among these is the ability to catch a trend based on the fundamentals of the market. For example, if the United States Federal Reserve announces an interest rate hike, traders may increase their interest in the dollar. These positions will be based on the long-term view of American monetary policy and the decision may create a trend. Another advantage is that position trading is not susceptible to short-term volatility caused by the noise of the market. Additionally, maintaining the accounts requires less hands-on work because the research and decision-making regarding the purchase and sales price have already taken place. Nevertheless, this type of trading does come with a set of disadvantages including being exposed to systemic risk that occurs when a sector of the market undergoes a correction. The longer a person holds a position, the higher the possibility that the market will experience this condition. Another disadvantage is that capital will be tied up to the asset while the currency is being held. Furthermore, gains will only be realized when a position is closed, which means that profits cannot be reinvested to create a compounding scenario.
All types of trading strategies come with inherent risk. The idea is to reduce the amount of exposure by replacing risk with information and knowledge so that investors are making calculated and smart decisions based on facts and data, not intuition. Therefore, if you are considering investing in the foreign exchange market, make sure to learn as much as possible about the specific currency and the trends. Furthermore, learn about the sensitivities of currency and the possible systemic risk surrounding the country that handles the currency, including long-term monetary policy and economic conditions.