Long Term Trading Strategy for Forex
There are a lot of reasons why I believe that a long term trading Strategy sets you up for success more so than using smaller time frames to trade, and I will get into several of those reasons within this article.
I also lay out a few of those reasons in a more light-hearted tone in my Scalp vs Swing Article which has gotten a lot of attention.
The first thing I want to do is clarify that when I say “Long Term” I am meaning at least looking on the daily charts. I believe that one of the big issues with Forex traders today is that they are so caught up in short-term trading and scalping (which again, I really do have a hard time believing traders can be profitable with), that they don’t even recognize what long term trading is.
I have had many traders say something like this to me: “I want to begin looking at best long term forex trading strategy because scalping has not worked for me. I am now using a long term strategy, trading the hourly charts.”
See, I think the above statement is one of the issues with Forex Traders today and why so many have a lot of trouble being profitable. Learning this type of trading is one way you can learn how to become a successful forex trader.
For some reason, the majority of traders—especially beginners—are so bent on scalping that they don’t even have a realistic idea of what long term trading really is (I know my friend, Zaheer . will agree with me on this one).
So again, when I am talking about “Long Term Trading,” I am talking about using the Weekly charts (and even the Monthly) as your guide for set-up potential and targets, and then, perhaps, using a lower time frame to actually execute the trade for more precision.
Before I get into the actual strategy I want to share with you, I want dig a little more into why the right perspective is so important when it comes to trading long term strategies—I know that many of you only care about the actual strategy guidelines, but I believe that the following information about perspective and a holistic approach is actually more important than the strategy guidelines (comment below if you agree/disagree with me on that).
As an example of how this “Short Term Mindset” can get you into trouble, let’s take a look at the EUR/USD.
Someone looking at the EUR/USD on a 4HR chart would see something like this:
EUR USD 4 HOUR CHART
In the above chart, you see that there is a lot of bullish momentum moving toward higher highs. From this perspective, it looks as though all bullish continuation set-ups will be great entries; however, a longer term view of the EUR/USD at the same exact time tells a different story:
WEEKLY EUR-USD CHART
You can see by looking at the Weekly chart, that the EUR/USD is in a long term forex trading strategy down trend, and that the bullish rally on the 4HR chart is just a pull-back rather than a raging trend as it appeared before.
Not only is it only a pullback, but it is a pullback heading into unsuspected resistance (unsuspected if you only look at the 4HR and don’t realize what is going on long term).
If we move a little bit ahead in time, you can see a bearish bounce off the resistance level. To the trader viewing only the 4HR chart, this may look like a great time to buy again in anticipation of Bullish trend continuation…
buy set up on eur usd
What the 4HR trader may not realize is that this is not a pullback of the 4HR trend, but rather a continuation of the Weekly trend. So, where the long term trader sees obvious Bearish continuation potential, the short term trader thinks this is “just a pullback.”
So to the 4HR trader, this looks like an unexpected major reversal in the market, but to a long term trader, it is an obvious and expected continuation of market flow, looking like this on the Weekly view:
This is why it is so important to have a long term view of the market ESPECIALLY if you are going to call yourself a long term trader. Again, so many people looking at 4HR charts think they are long term traders, but they are ignoring the real long term time frames—and that can get you into big trouble just like in this real life example… Those two bearish weekly bars you see would crush someone trying to take long positions on the 4 Hour chart, yet they are just part of the flow on the Weekly view.
Now, I am not saying that you cannot trade profitably on the 4HR charts; I am saying that it is very difficult to make consistently profitable trades when you do not have a good perspective of the markets longer term movement—especially when trying to trade an intermediate time frame like the 1 or 4 hour time frames.
With that said, let’s talk about my long term strategy for traders who want to be profitable and consistent! 🙂
One major note about this strategy is that you must be disciplined if you want to succeed. Yes, you need to be disciplined with all strategies to expect success, but in particular, if you want to trade a long term strategy effectively, you must control your emotions and desire to “get into the market.”
One of the biggest mistakes that unprofitable traders make is over-trading and over-managing their trades. As human beings, we have the desire for action and involvement which tends to cause us to always want to have a trade open or always want to manipulate the trades we do have open, and I can promise you that this will only lead to less and less profitability.
If you want to be successful using the long term strategy that I am presenting to you, you must accept that there will not be a ton of entries (which is a good thing, in my opinion) and that there will not be a need to “jump in” to the open trade and manage it.
Here is how the strategy works:
1 T ake a look at the Monthly and Weekly charts.
Looks for trends on these longer term charts that have good momentum in the respected direction. Something like this:
WEEKLY CHART OF TREND
Identify the direction of the trend (bear or bull) and make a note to only look for entries in the direction of that trend (for instance, if it is a bullish trend, look for buys).
2 Zoom into the Daily Chart and draw a Fibonacci Retracement from the current high to current low (or the other way around).
Here is how to draw a Fib Level for those that don’t know:
3 Look for pullbacks on the Daily time frame that are approaching the 38.2, 50.0, or 61.8 Fib Levels.
usd cad daily forex chart
If price is getting close to one of those 3 key fib levels, be prepared to make an entry.
4 Look for Candlestick Entry after Fib Level is Tested (touched by Price)
As soon as price touches a weekly Fib level, you are now in the “waiting for signal” mode. In other words, the criteria has lined up for you to make a trade, now all you need is the signal to confirm your forecast.
For this strategy, the signal is a momentum daily bar in the direction of our long term trend. An ideal daily signal candle will have a tail that has tested (pierced through) the Fib level, but then reversed back into the direction of the trend:
test of fib level
5 Take the Entry. Place your stop and target.
6 th Wait… then win or lose.
Just like I showed you in the video above; some trades win and some lose.
Don’t try to manage the trade or get fancy, just trust the strategy and let the trade be a winner or a loser. Trading is all about Math—a good strategy has winners and losers, but at the end of the year, the winners out-weigh the loser. They will in the strategy if you follow it with discipline!
Hope you guys enjoyed learning one of my favorite long term strategies. Please leave a comment with any feedback.
Comment if you plan on trying the strategy or comment if you hate the strategy!
Either way, I’d love to get your feedback!
Winners Edge Trading is offering a special discounted offer to our long term trading strategy.
The trade shown, in my opinion, was not a solid trade. The bullish pull back piercing the 328 fib was only followed by a small bearish candle that wasn’t full bodied. It’s indecisive. If you wait for the full bodied decision candle going in the direction of the trend (bearish here) after piercing a major fib level you would not have entered until the 50 fib was pierced. That may have prevented you a loss on entering on any trend following candle with no substantial body (decision by the market). You’re providing great info here. keep it up.
Enjoyed the writing and video’s but will have to go over it again a few times as I am a newbie and using longterm for the fist time. Thank you for the information, they are helpful and exciting.
I think the reason most people try to scalp is they are taught to be scared of the market by teachers that are trading failures…I agree with Nathan, the trader that is here for the long term is a swing trader…..the data that can be used is measured in volumes instead of snippets….the next thing to get past is letting a profitable trade run and not being so scared of a loss you fail to maximize profits….the one piece of advice I would give every trader is learn enough about Elliott Wave to distinguish the difference between motive waves and corrective waves and once you see the tell tale sign of one, know what the most likely out come of the next move….is it a retrace or breakout, and how far is it expected to travel so I can set profit targets with no guess work and I can set stops that only trigger when I am proved to be wrong…..Good trading everyone. Tim
Nathan, how do you deal with the swap rates with this longer term strategy?
I trade this way but often have to close a trade due to the overnight swaps.
What broker do you use? I am looking for a broker with competitive swap rates, I know some pairs have a positive value but I cant consider that when looking at the longer trends.
Thanks Nathan! An awesome strategy! It is my favourite strategy. My problem is I lack the necessary patience it needs to be profitable. You wrote “Trading is all about Math—a good strategy has winners and losers, but at the end of the year, the winners out-weigh the losers. They will, in the strategy, if you follow it with discipline!” if I may add, AND PATIENCE. Great write-up! Very encouraging! I am definitely going back to this strategy in 2014.
Excellent strategy, I have been looking for a good simple long term strategy,this will free up my time and still allow me to be involved in trading. Thanks very much 🙂
Thanks for reading! I am glad this article may serve as a useful piece of information for you. Feel free to re-post here later on and let us know how your strategy is going using these longer time frames.
Thanks Louis, I appreciate you taking the time to read and also leaving a comment. Let me know how you do using this strategy!
Hey Joe, thanks for the great comment, I really appreciate you putting the time and effort into adding value to this post with a great, informative comment. I don’t believe I have ever heard anyone lay out the reasons for using the daily chart as you did, and that is very interesting..
I would love to learn more about your strategy, Perhaps you could write out a nice explanation of it like I did in this article and we could post it on the blog as a guest post by you. I am sure our readers would love to get your perspective!
Hi Nathan, I agree with longer time frames and specifically days not hours, minutes or weeks. I my self only trade off day charts, and these are my reasons.
1. Spread eats up a large part of an intraday trade – often 10% or maybe more.
2. The broker is acting against you – he loses if you win, and he wins if you lose. This is in the fine print of all new accounts. A dealing desk will give lower spreads but will actively make you lose.
3. Days are the ‘natural’ time frame for trading, where as hours or minutes or weeks are arbitrary units.
4. Candles were always meant to be on days – from the earliest time in Japan this is how they started.
5. Days means you can plan trades at ease.
I think these are compelling reasons to trade from day charts, so that’s what I do.
PS. If you are interested, I just look for trends and jump on. I use pairs that naturally tend to trend for long distances (such as the Euro crosses among others EURNZD etc) I use MA8 and MA12. When the MAs are both rising, and the 8 is above the 12, I put a long entry just above the most recent high. I trail along the MA8 until BE, then along the MA12 when it catches up. I raise the stop to below a candle that suggests the trend may have ended (eg a pin bar against my trade). If it isn’t taken out I wait for the MA12 to catch up and keep trailing. (the opposite of all this for shorts) No fib levels used. Pretty successful!
Thanks for this, I have tried this some on dly & hrly charts and had some success,but needed these s/l & target levels to profit.will work on your longterm trades with this system with patience.Will advise outcome down the road.
Thanks for the information, I plan to start the new year with longer time frames and I was going to use 4 hour charts. But now I will look at weekly and daily charts more.
HEY NATHAN, GOOD ARTICLE.
AS FAR AS LONG TERM VS. SHORT TERM, BEING SUCCESSFUL IS ABOUT FINDING WHAT SUITS YOUR PERSONALITY. WHEN I STARTED TRADING FOR A LIVING I THOUGHT DAY TRADERS WERE NUTS. I TRADED LONG TERM AND GOT KILLED BLEW UP 2 ACCOUNTS.
THEN I TRIED SHORT TERM AND FOUND IT SUITED MY PERSONALITY WAY BETTER. NOW I TRADE SYSTEMS USING 1HR, 15 MIN, 5 MIN AND 5 PIP RANGE BARS. I AM A DISCIPLINED BUT NOT A PATIENT ONE. THERE ARE THINGS YOU CAN PICK AND CHOOSE WHEN YOU TRADE, BUT YOU CAN’T IGNORE WHAT YOU ARE.
Pretty good stuff Tracy…U a good honest Guy Compared to all the crapp out there in the Forex arena!…We appreciate u!…. MERRY CHRISTMAS & GOD BLESS !
Hey Fabrice. As always, thanks so much for your time and effort into learning and your constant appreciation–it means a lot to us. For me, candlesticks are definitely an important part of seeing levels. One thing that speaks volumes to me are when there are repeated wicks of a candle that tried to pierce through a certain price level but continued to get rejected. This shows me that price has made multiple attempts to move to a higher (or lower) price but kept getting pushed back by the level. When this happens over days and weeks on these longer time frames, I know that this is a big, important level. Then, what I look to do, is pair that with another level. For instance, if the major horizontal level also corresponds with a Fib from a recent swing or a current trend line, that adds even more value to the price level. Once I clearly identify these important levels, I just wait for price action to react to them and then attempt to take advantage of the reaction. If it is a trend line and horizontal combination and price rounds out right at the level and begins to continue the long term trend, I will certainly be looking to take that trend continuation trade because it is a high probability entry and, most importantly, I have very major level to protect me against price going against me even if it is trying to bounce the other way and retest the trendline/level/fib or whatever. For me, candlesticks help me “see” price the best, but that definitely does not mean they are the only way to trade profitably–it is just my personal preference and you should have your own preference too!
Excellent and simple strategy. Will be adopting this one
To me, this is excellent stuff with precious tips and avices (like going WITH the longer time frames trend, where to put stop-loss and target, avoiding entry if major level is too close from entry, …). I will definitely put that strategy into my trading plan !
What I love with you and Casey is your honesty and transparency (not ONLY showing winners but clearly saying and showing that we will loose too !).
I am always amazed with the quality of your articles and the knowledge you already have at your young age. How good wil you be at 30 or 40.
Just one very basic question:
– how do you define and recognize a major level (do you always look at candle charts only to spot it ?) ?
Thanks so much for all your efforts in helping us trading with an edge.
Hi Zaheer, thanks for reading and leaving some feedback.
Let me address your questions:
1. This “pin bar” occurs pretty often, about 30% of the time I’d say, because often times price moves slightly through the major level before reversing back to respect the level.
2. I typically use a risk of .5% per trade, but if my trade management strategy includes potentially adding to the trade, then I would adjust the risk to make sure that I don’t have risk of more than 1% open at one time.
3. In this strategy, I am not typically going to add to the trade if it does continue in the larger trend direction, because my target is going to be too short to use that methodology. In order to make the strategy as high probability as possible, I am only targeting the “bounce” to the next major level which is not normally going to be far enough away for me to begin adding positions in my favor.
4. The pip gain on the “bounce method” changes drastically depending on the pair and the largeness of the swing that you are using the fib retracement on. For instance, if the swing is several thousand pips (like a massive run on the GBP/NZD) the distance between the fib levels–which directly affects my stop and target–will be much much different than a 500 pip swing on the EUR/GBP.
Hope the above answers your questions appropriately.
Thanks again for reading and leaving a comment!