The Four Demons of Trading: How to Avoid Them?

Why and how position trading in the FX market can work, if you use zero fee accounts.

Apr 18 • Forex Trading Articles, Market Commentaries • 4368 Views • Comments Off on Why and how position trading in the FX market can work, if you use zero fee accounts.

Most traders know there’s four key styles of FX trading: scalping, day trading, swing trading and position trading. At one end of the spectrum is scalping; your trades typically last seconds or minutes, as you search for small price action related gains, banked extremely quickly. At the other end of the scale is position trading; you might stay in trades for weeks or months and only exit or alter your positions, based on critical emerging geo (or domestic) political events, or fundamental events and news releases.

If you’re a position trader, you might make trading decisions based on interest rate adjustments by central banks. For example; if the USA FOMC raises rates and broadcasts an: aggressive, hawkish, monetary policy, intimating that further tightening may occur, then the value of the U.S. dollar might rise, versus nearly all of its currency peers. And despite the normal day to day fluctuations in value, the likelihood remains that if the key, base interest rate of the FOMC/Fed, is considerably out of step with that of its peer central banks, then USD will rise and the rise will be underpinned over a sustained period.

It’s worth observing the longer term price action, on time frames such as the weekly or monthly charts, noticing how USD has moved versus its peers over the past year 2018-2019, to obtain an illustration as to how such a phenomenon as interest rate rises, can impact on the value of a currency. GBP/USD is down circa -8%, EUR/USD is also down circa -8%, AUD/USD is down -7.50%, USD/CAD is up 5.7% whilst USD/CHF and USD/JPY are up circa 4% respectively. A quick calculation reveals that if you’d simply stayed bullish USD in these pairs, you could be up a total of circa 36% yearly. Obviously that would depend on various factors, but hopefully you get the point.

It’s important that FX traders don’t become seduced by the claims many forum traders will make, as a 36% return yearly through FX trading, would represent an excellent result, particularly if you compare it to the current level of interest received in bank deposit accounts. Moreover, as a position trader, you could experience such a return with little stress, whilst keeping strict control over your risk parameters. But to become a dedicated, highly proficient and hopefully profitable FX position trader, isn’t a simple process. Many traders quickly begin to realise that trading looks straightforward based on hindsight analysis, but when you’re faced with only white space to the right hand side of your selected time frames, the investment prospect isn’t quite as simple.

Timing is just as important with position trading, as with any other style; enter or exit too late or too early, through basic errors of misjudgment and you could find yourself on the wrong side of the trend direction. With scalping or day trading, you might have stops of circa 10 pips, alternatively, with position trading, you might have to place a stop close to the last swing high or swing low, which might be 200 pips away from current price. Moreover, you have to develop a “sitting on your hands” patience, which is totally unique to a trading style which has more in common with like long term investing, than traditional currency trading. 

There’s also one overarching issue, regarding the concept of position trading, which underpins the phenomenon, an issue that if you don’t get right, then your chances of success are severely restricted. You have to trade through the right account, an FX trading account that has zero fees. If you’re considering position trading as an option, then unless you’re paying zero swaps, your chances of retaining FX profits, is drastically hampered. Swaps are also described as “overnight charges”, in simple terms it’s the cost to “swap over” to the next day’s FX trading sessions.

If you’re paying for swaps, the extra cost can render your efforts worthless, if your gains are largely eaten up by daily fees, applied to your trading account. It’s also notable that brokers who offer accounts which have zero swap fees, are generally brokers used to handling huge size and accounts. They offer such a fee free service, in order to also appeal to large position traders. Typically, these are clients who not only demand the usual qualities you’d expect from an STP-ECN broker, they insist on the broker having an excellent reputation, whilst being a destination to safely park their funds.

In the Eurozone, the ECB currently applies a negative interest rate for deposits of -0.40%, brokers offering zero swap fees have an edge on bank deposit schemes; many conservative investors will safely park their cash and take an FX position with zero fee account brokers, rather then leave their money in a deposit account, where it’s value will atrophy. Therefore, if you’re considering position trading then you’re in good company; with many of the wealthiest clients who trade or invest in currencies. And if your not position trading, then you might also want to ask yourself the question; why you’re not trading through an STP-ECN broker, who provides zero fees account trading facilities? As it’s the only logical and credible choice, for traders and investors of all styles and levels of wealth.   

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