4 Key Long term Forex Trading Strategies

The long term Forex strategy involves holding on to trading positions or other securities for an extended period of time. This style of market participation is popular among some traders as well as among investors.
There are several strategies for trading Forex for the long term. From the technical analysis point of view, one popular method is to look at the 200-day moving average In Forex. This represents the average closing price for the last 200 business days of a given currency pair. This indicator is used to identify and analyze the dynamics of long term trends.
Comparing the relative real interest rates of different currencies is another long term Forex strategy. This involves subtracting the rate of annual inflation from the key central bank interest rate of a given currency. The main idea behind this is that currencies with relatively higher real interest rates often tend to appreciate against its peers.
Another popular long term FX trading strategy involves comparing the current exchange rates to the Purchasing Power Parity (PPP) levels. Essentially, PPP identifies the exchange rate at which the average price of goods and services would be equalized among two different countries. Consequently, currencies that trade below PPP levels are considered to be undervalued and subsequently more likely to appreciate in the long term.
This indicator is measured by several institutions, including the Organization for Economic Cooperation and Development (OECD) and even by the famous British financial newspaper ‘Economist’ through its Big Mac index.
When trading long term, traders need to take rollover charges into account, since in the long term trading they hold positions for weeks or months, those expenses can quickly add up. Therefore, it is always helpful to look for ways to reduce or avoid them entirely.

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Strategies for Long Term Forex Trading

When it comes to long term trading, there are a couple of important strategies:
  • Utilizing 200 Day moving Average
  • Reducing or avoiding rollover charges
  • Conducting extensive fundamental analysis such as comparing relative real interest rates, analyzing trade balance, etc.
  • Using Purchasing Power Parity (PPP) indicator

200 Day Moving Average

One example of long term Forex trading strategy is using 200-day Simple Moving Averages (SMA). This indicator is calculated by the average closing price of the last 200 trading days. It is mostly used for determining the long term market trends. In general, when the currency pair remains above the 200-day SMA, it is considered to be in the uptrend. Conversely, if the price of the security stays below this indicator, then it is deemed to be in the downtrend.
In the long term, FX trading strategy the 200-day Simple Moving Average can also serve another purpose: during the uptrend, it turns into a significant support level and in times of downtrend it becomes a major resistance point.
200 day SMA is frequently used in conjunction with other indicators like 50-day SMA. When one line crosses the other, it is usually considered as a sign of trend change.
So essentially this long term strategy for Forex trading works like this: Traders can look for currency pairs where, according to moving average indicators, there is a clear trend and open positions to capitalize on that. It's important to note that moving averages are best for trading trends, and they fail to provide reliable signals when markets are ranging.

Reducing or Avoiding Rollover Charges

Because of the borrowing costs and interest rate differentials, brokers charge clients rollover fees for holding most of the Forex positions open overnight. There are some trades where the broker pays the client a small interest as well. This mostly depends on the central bank rates.
For example, let us suppose that a trader is analyzing the EUR/RUB pair and is looking to open a position. As of April 2020, the European Central Bank still keeps its key interest at 0%, when the Bank of Russia is holding on to 6%. So since at the moment, Russia has a higher-yielding currency, therefore for holding a $100,000 short position overnight on EUR/RUB, a broker might pay a client $5.
If a trader analyzes the latest charts and concludes that the Ruble might appreciate against the Euro, then there are no problems with holding on to short EUR/RUB positions for a larger time frame. In fact, at this rate, traders can earn $150 per month for doing so.
But what happens in the opposite scenario? What if the Euro is in an uptrend against the Russian Currency? Because of unfavorable interest rate differentials, a broker might charge a client $25 for holding a long $100,000 EUR/RUB position overnight. Now, this amount might not be a life-changing sum. However, when it comes to long term strategy for Forex, it is helpful to keep in mind that those expenses will eventually add up to more significant amounts. At this rate, in three months rollover charges can reach $2,250.
Therefore, traders might identify good trends for long term trading, however high rollover charges can significantly reduce his or her potential payouts. So how can we deal with this issue?
The first obvious solution to this problem is to shop around. There are many Forex brokers with more competitive rates and consequently lower rollover charges, so potentially traders can save hundreds of dollars on their long term positions. Some of them even offer rollover free accounts, in exchange for a small flat fee or larger spreads. So there are several options to reduce those types of expenses.

Relative Real Interest Rates

The real interest rate essentially measures how well will deposits maintain their purchasing power in a given currency. For example, nowadays, the Federal Funds Rate is set within  0 to 0.25% range. At the same time, the latest US Consumer Price Index (CPI) indicates 1.5%.
So let us suppose that a customer opens a $1,000 deposit or CD for one year, which pays 0.25%. After 12 months he or she will earn $2.5 in nominal terms, but if the inflation rate stays at the same level, the deposit will lose 1.25% of its purchasing power, calculated by 0.25% minus 1.5%. Consequently, we can conclude that the real interest rate of USD is -1.25%.
But how about those central banks which have even lower interest rates? For example, the Swiss National Bank holds rates at -0.75%, yet the Swiss Franc held its ground quite well against the US dollar, in fact, compared to a year ago, it has appreciated by approximately 5%.
Well, nominal interest rates are only one part of the equation. The latest Swiss Consumer Price Index came out at -0.5%. So the real interest rate for CHF stands at -0.25%. Consequently, one possible reason for the Franc’s strength is that the real interest rates in Switzerland are 1% higher than in America.
When it comes to long term strategies for trading FX, it might be helpful to keep in mind that Central Banks can not enforce negative nominal interest rates. The fact that SNB reduced rates to -0.75% does not necessarily mean that all savers and investors will be happy to pay interest for the privilege of holding Francs in their accounts. Some clients might choose to take out cash and keep it in a safe or on current accounts. So for those people, the real interest rate for CHF would be 0.5% since Franc is gaining buying power due to 0.5% deflation.
Long term Forex strategy
As we can see from the chart above, all major currencies are experiencing the negative real interest rates. One reason for this is that as a response to the COVID-19 pandemic, central banks across the world have anticipated an upcoming economic downturn and reduced their interest rates considerably.
However, this does not affect all currencies to the same degree. For example, real interest rates in the case of CHF, JPY, and EUR are still notably higher than in the case of their peers. This is especially true when it comes to GBP, CAD, and NZD. If their negative real interest rates remain at such a level, this can eventually lead to their depreciation.
The basic idea of this method is to calculate the real interest rates of different currencies and open long term positions for the ones which have higher real interest rates.

Purchasing Power Parities

One of the most famous long term strategies to trade Forex is utilizing Purchasing Power Parities (PPP) and comparing this indicator to the current market exchange rates. PPP is essentially defined as the exchange rate at which the average price of goods and services will be equalized between the two countries.
So if one country has consistently lower inflation rates than other nations, then over time its exports will become cheaper and attractive for foreign importers. To access those goods and services, the foreigners need to buy the local currency, so this creates a natural demand for it.
Therefore, the currencies which trade below PPP levels are considered as ‘undervalued’ and ones which trade above PPP are deemed as ‘overvalued’.
The Purchasing Power Parity is measured by OECD using large statistical data on the prices of goods and services in different nations. PPP is also the main idea behind the Economist’s Big Mac Index, which tracks the average price of this iconic burger in dozens of countries. Essentially BMI includes the price of bread, beef, cheese, vegetables, as well as transportation, labor, and rent costs. Obviously, it is not as comprehensive as OECD figures, but it is at least easy to digest and therefore more helpful for making quick calculations.
How can PPP strategies be used to trade FX for the long term? Basically, the trader is focused on identifying the most undervalued currencies and places trades in accordance with their potential for appreciation.

Role of Fundamental analysis in Forex long term trading strategy

Long term forex investing is typically based on the economic outlook of the countries where the currency is dominant. For instance, the strengths of European economies can increase the value of Euro in relation to other currencies. How can we measure the strength of European countries? We can take a look at manufacturing, trade deficits, job creation and employment, Consumer Price Index and interest rate decisions.

Keep in mind that one of the strongest metrics of how currency will change is interest rates. High interest rates mean that regular people will avoid taking loans from banks, which will result in reduced money in people's pockets. As a result, the value of currency will increase. When forex long term trading, it's critical to note that interest rates have various effects on the economy. High interest rates are good for a currency strength short term but bad for long term. Increased rates limit money in circulation, which makes currency artificially stronger. However, in the long term, less money means less profit for companies and less sold goods. When income and spending decreases, recession begins, and the economy gets damaged. Ultimately, recession can cause weakening of a currency. Central banks know this very well and avoid hiking rates unless they have to The main job of central banks is to keep inflation in a healthy, predetermined range. 


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Long Term Forex Trading Strategy – Key Takeaways

Forex trading long term strategies
  • The long term factors in Forex can take months to manifest, but their impact is usually more significant on the currency pairs. Therefore, those strategies are designed for trades and investments with large timeframes and may not be helpful with day trading.
  • In the long term, the relative real interest rates can be more important than nominal interest rates. The Bank of Japan and the Swiss National Bank had some of the lowest rates in the world for decades, so their currencies should have depreciated significantly. Surprisingly, CHF and JPY during most years held their ground well. The reason behind this may well be in very low inflation rates.
  • The Forex exchange rates do not always follow Purchasing Power Parity levels closely, however, most major pairs mostly trade at a relatively close range of PPP. When they diverge from this and become too overvalued or undervalued, they eventually make significant adjustments and return closer to PPP.

FAQ: Long Term Trading Strategy for Forex

What were some of the examples of the most extreme undervaluations or overvaluations of currencies?

The Norwegian Krone (NOK) had a rare case of massive overvaluation. From 2005 to 2013 the average closing daily price of USD/NOK was near 6.00 mark, according to different measures the Purchasing Power Parity varied between 9.00 to 10.00 levels, depending on the year. So the Norwegian currency was more than 60% overvalued against the dollar.
As the oil prices started to collapse in 2014 the correction of this imbalance was swift and substantial. Eventually, the appreciation of USD/NOK surpassed 70%, nowadays, pair trades near 10.50 level.
Strategies to trade FX long term
Another example would be 2008 when EUR/USD at one point reached 1.59 level, by several metrics this represented at least 50% overvaluation compared to PPP levels. During the second half of that year, the common currency fell significantly, and nowadays, the pair trades near 1.10 mark.

How does deflation affect currency exchange rates?

There are essentially two implications of deflation from the Forex point of view. In the short term, when the Consumer Price index of a given country shows a negative number, it hurts the currency. This is because traders and investors assume that the central bank will respond to this news with rate cuts and maybe even quantitative easing programs.
If deflation is a short-lived event, then it might not have any major long term consequences. However, if this state of affairs persists for various years, then it can improve the Purchasing Power Parity levels for the currency. Because of persistently low or negative inflation, goods and services in that country become cheaper and more attractive to foreign buyers. As a result, in the long term, the currency strengthens against its peers.

What are Dual or Triple currency deposits and how they work?

Dual currency deposit is very similar to the Certificate of deposit, there is a fixed term and interest rate. However, one big difference is that the client chooses two currencies. It is essentially very similar to using Forex trading long term strategies.
For example, an individual can make a $10,000 USD deposit for a 3-month term, at 1%. At the same time, he or she decides of the Australian dollar as an alternative currency. If at the end of the term USD appreciates against AUD by 10%, then the client will receive a deposit in Australian dollars, earning 11% in total, 1% bank interest, and 10% by favorable Forex moves.
If the market moves in the opposite direction, the depositor will receive his or her cash in USD.
The Triple currency deposits have the same basic structure, with the difference that the client selects two alternative currencies. For example, for $10,000 USD deposits, an individual can choose AUD and EUR as alternatives. So if by the end, the US dollar appreciates against any of those currencies, the client will receive his or her money in that currency and earn a higher return in the process.

What are some of the most common mistakes with long term trading?

Strategies to trade Forex for the long term can involve holding on to positions for weeks or months. Therefore, there can be a significant variation in the exchange rates during this period. Consequently, many traders make the mistake of using overleveraged accounts. Even with 1:50 leverage, it only takes 2% market swing against the trader’s position for it to be wiped out.
Another frequent mistake traders make is ignoring the rollover costs, which can add up to a significant amount over a longer period of time and reduce payouts significantly.
Finally, some traders use long term strategies to trade Forex, but when they open positions, they overreact to the latest market news and closing trades prematurely at a loss.

How different is long term trading with emerging market currencies?

There are two specifics when it comes to trading emerging market currencies. Firstly, most of the central banks in those countries have a much higher interest rate. So in this sense, it might be profitable to hold long positions for those currencies.
The second consideration with this is that most emerging market economies experience higher inflation rates, and here exchange rates are much more volatile than in the case of Forex majors. Therefore, engaging in the long term trades with those currencies can be a risky proposition for some traders.

How to trade long term forex?

Investing long term in Forex markets involves placing more calculated trade orders. Typically, long term traders and investors put more emphasis on fundamental analysis that includes studying trade balance, employment numbers, interest rates, inflation (based on Consumer Price Index CPI), government policies, etc. Major economic announcements are usually followed by unpredictable short term market reactions, however, the economic factors influence prices long term. Investing in Forex long term requires more capital than what day traders would need. The reason is that investors make more calculated decisions, and therefore they place less frequent trades. Each long term trade size is typically larger than intraday trade size. The best way to approach long term trading is to study what influences certain currency pricing. For instance, some currencies such as Canadian Dollar, Australian Dollar and New Zealand Dollar are heavily influenced by commodity price changes. Canada is one of the largest producers of oil, and it's logical that oil price can influence the Canadian dollar. 


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