Adjust your tactics to the time horizon

MARKET volatility during the financial crisis meant that traders shortened their time horizons and looked only to trade in the very near-term. Massive swings in the markets, currencies included, meant that it was impossible for investors to make long-term trading decisions and hedge them appropriately. <br /><br />But with conditions calming considerably to pre-Lehman levels, medium and long-term forex trading are now more viable and effective, whether you are looking to speculate or hedge your positions in other asset classes. But different time horizons require different strategies and how you trade is just as important as what you trade. <br /><br />So what should your aims and tactics be as a short-term, medium-term and long-term currency trader? <br /><br /><strong>CAPTURING PIPS</strong><br />While the daily moves that we saw in the markets last autumn are no longer as substantial nor as frequent, that does not mean that day trading has gone out of the window. And the consistent liquidity in the forex markets allows for extremely short-term trading by speculators looking to capture a pip or two in the price, known as scalping. Typically a short-term forex position will be held for a few minutes, and rarely more than an hour, whereas in other asset classes short-term trades are perhaps held for a day to two. <br /><br />Scalpers have to be the fastest and most disciplined traders in the market because they have to make decisions in a split second and therefore need to have planned their trades well in advance.<br /><br />Because you are looking to make only one or two pips profit per trade, you can&rsquo;t afford to be trading currency pairs with wide spreads. Ideally, you should aim for a pip gain at least as large as the spread, advises Brian Dolan, chief currency strategist at He adds that you should choose only the most liquid pairs, and only trade one pair at a time, because you&rsquo;ll need to concentrate all your attention on that pair to capture the maximum profit. <br /><br />If short-term scalping is not suitable for you but you still want to make the most of the volatility that is still out there, then medium-term directional trading could be more appropriate. <br /><br /><strong>FUNDAMENTAL VIEW</strong><br />In this strategy, positions are held for perhaps a few hours and the trader seeks to get the overall direction right. A successful medium-term trader will always have a fundamental view about the way the currency pair is likely to move and have well-defined entry and exit points. This can be a particularly effective strategy when currency pairs are range bound. <br /><br />Most private investors will be either short or medium-term forex traders and long-term trading is reserved almost exclusively for hedge funds and institutional traders. <br /><br />Dolan says the key to long-term trading is to hold a small enough position relative to your margin to withstand substantial volatility in the pair. <br /><br />Calmer markets mean that medium-term trading is once again an option for the forex trader, but market players need to adapt their strategy to their horizons and the prevailing conditions.