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When newly participating in the forex market, traders are well-equipped with such fundamental and advanced knowledge as what pips are or how technical charts are analyzed to predict consecutive market trends. Many thoroughly research the most suitable time to enter the market, but often ignore where they should put an end to currency transactions. Therefore, this article tries to deal with this question by disclosing relevant attributes that identify how long you should keep a forex trade open.
How Long Can You Keep a Forex Trade Open?
Forex is well-known as the biggest money market with a daily turnover of US$6.6 trillion, as of April 2019. Accompanying potential benefits such as the leverage tool, demo account and more, forex’s deregulated nature can translate to unanticipated risks when speculators formulate no effective trading strategy to protect their reserves from strong price moves.
One of the basics that should be included in trading plans is when to open and close a position. Normally, forex traders would place an entry point in the most active time of the market, typically the overlap of two trading sessions. For example, provided you transact the EUR/USD, you are encouraged to open a long/ short position from 1 PM to 5 PM GMT+0. In this interval, both London and New York sessions, which represent the two largest economies in the world, cross.
Various newcomers do not take the exit strategy into consideration though. Theoretically, they can hold a position as long as they want, which depends much on their pre-set trading plans and goals.
Were the pair’s price to continue moving in their favor for a long enough time, they would earn big money. However, the real forex market proves more complicated. Comprising two foreign currencies, forex’s investment products are subject to the impacts of economic and political situations of issuing jurisdictions. Any major news can be a good or bad sign, not to mention that some of them may suddenly arise. The vast majority of beginners badly analyse trading signals and consequently suffer serious failure. Therefore, the longer their position remains open, the higher stakes they may get exposed to.
By comparison, the stock market’s trends are more predictable as its value is profoundly affected by the company’s events such as launching a prospective product line or expanding to new markets. Based on the given distinction between forex and stocks, financial experts warn inexperienced traders against keeping a forex trade for a long time. Instead, the buy-and-hold strategy is seemingly appropriate for the seasoned who prefer long-term investments on the forex market or carrying a trade.
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For How Long Can I Hold a Position in the Forex Market?
As already mentioned, there is no restriction on the duration of holding a forex position. In other words, forex traders might leave their positions open within a few minutes, days or even months. This relies much on their objectives and experience. In an instance, the expectation of earning 10 pips and 100 pips could lead you to different time periods of staying in the market. Accordingly, you may either hold the position much longer or open many trades simultaneously until the target is reached. Before reaching the final decision of which option suits you, you have to consider various criteria in trading strategies.
Forex traders now are categorized into different groups in accordance with their short-term or long-term aims. The common trading psychology is that market participants often speculate on price movements with the expectation of obtaining fast returns. Hence, they might feel impatient and demotivated when pursuing a long-term goal. Instead, they aim at trading on shorter time frames; this leads them to become day traders or scalpers.
Both given jobs intend to take advantage of intraday price fluctuations to expect huge financial gains. Admittedly, price actions within a single day are probably less significant than in the long run. Thus intraday traders make great endeavors to open as many positions as possible to increase their potential returns before closing all transactions on the same day. In the worst scenario, improper trading strategies can result in serious failure.
Sometimes, traders would apply the buy-and-hold strategy as they recognize income potentials from the longer-time economic trends in countries whose fiat currencies are being traded. Even they have to grasp and foresee the influences of geopolitical factors on the future moves of currency pairs.
The China-United States trade war is a typical event for those venturing on CNY/USD (Chinese Yuan/ US dollar). The Trump tariffs and other trade barriers that have been imposed on China corporations since 2018 devalued the renminbi against the US dollar. However, China’s economic upturn after the Covid-19 attack, whereas the USA is struggling with the pandemic, signals the yuan appreciation and dollar depreciation from late 2020 onwards, according to CNBC. Those making an accurate prediction about the prospects of the CNY/USD can hold the position of this pair for a long time.
Further, those who wish to profit from the buy-and-hold strategies can function as carry traders. That is, they would go short on low-yielding currencies (e.g. JPY – the Japanese yen) to buy and keep high-yielding currencies (e.g. NZD – the New Zealand dollar) to obtain the positive interest difference between two currencies. The most ubiquitous pairs for the carry trading purpose include AUD/JPY and NZD/JPY.
To illustrate, the interest rate of the Japanese yen as of late 2020 was -0.1%, whilst the Reserve Bank of Australia (RBA) informed the rate of 0.1% in the same fiscal year. With that said, carry traders will receive a profit of 0.2% if they convert the borrowed Japanese yens into Australian dollars and invest those dollars in stocks that pay in Australian interest rate.
Accordingly, the best time to jump into this transaction is when the RBA makes a final decision or suggestion about a rise in its interest rate. Even when the Bank of Japan (BOJ) plans to increase the rate which is still lower than the Australian interest rate, carry traders still obtain incomes however small.
When devising a long-term forex trading plan, traders need to consider a variety of economic indicators such as unemployment rates, monetary policies from central banks and even market sentiments.
Apart from such perceived fees as bid/ ask spreads or commissions, long-term traders have to remunerate their brokers for rollover. This practice happens when you decide to keep your open positions overnight. Moving forward, traders would pay the rollover rate – commonly known as swap free or overnight funding – which refers to the interest rate differential between the long (buy) currency pair and short (sell) currency pair.
Assuming you go long on the EUR/USD, you are selling USD to buy EUR. In case the interest rate of USD exceeds that of EUR, the overnight funding will be debited to your account balance. On the contrary, you will earn this swap fee when the USD’s interest rate is lower than its EUR counterpart.
In addition, forex long-term traders have to consider other limitations such as hard-to-identify exit points or a credible enough broker to cooperate on long-term projects.
When it comes to how long traders should keep a trade open, another consideration is the proper exit points of their trades which often associate stop-loss and take-profit levels. By definition, the stop-loss order is designed to curb the trader’s loss if the market doesn’t move profitably. Meanwhile, the take-profit order determines the precise price at which the trader would walk out of the market with a profit.
Once a trader places an order, he needs to fill out pre-specified stop-loss and take-profit levels. When the price reaches one of those two points, the respective order will be automatically executed and then close out the trade. Having said that, the trader can manually exit the transaction by right-clicking the trade and choose to close the position if he forecasts the unprofitable direction of his traded currency pairs.
For example, you open a long position of the EUR/USD at the bid price of 1.18434 and expect the pair value to appreciate. The maximum loss you can bear is 10 pips so you put the stop-loss order at 1.18334. In concert with the risk: reward ratio of 1:2, you place a take-profit level 20 pips away from the entry point, at exactly 1.18634. Supposing that you think the market has a downward trend and shows no variation to stagnate, you may close out the trade before it reaches the stop-loss level. By contrast, when the price goes up and hardly surpasses the figure of 1.18534, you may get out of the trade at this price and make a 10-pip earning.
How Long Can You Hold Forex?
Once again, there is no regulated limit on the time span of leaving a forex trade open. This means you can close all transactions within the same trading day if day trading or scalping is your investment tactic. Meanwhile, those who wish to capitalize on the longer-term potentials of swing, position or carry trading have to face the uncertainty of specifying long-term trends and exit points of their trades along with rollover fees erosion their balance. If you are a novice, it is wise to follow intraday techniques to minimize the unprecedented long-term effects of the market.
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