¨In the Long Run, we Are All Dead¨
If John Maynard Keynes had been a Forex trader, he may have been one of the best short-term traders because of his preference for immediate action. As he was an advocate of proactive fiscal measures to combat severe economic imbalances, he is also likely to have preferred the benefits of short-term moves in the Forex instead of the long-term trends in the midst of global economic uncertainty.
Long-term trends in the Forex market – lasting at least 2 weeks – tend to smooth out the short-term volatility and allow the trader to benefit from larger ranges. They also provide a larger cushion for losses given the wider Risk-Reward ratio and give the trader a lot more time in between trades to analyze the market. However, the commitment to this approach assumes a high level of accuracy in the traders´ forecast based on technical and/or fundamental analysis- an accuracy beyond that of the average full-time trader.
Such a trader, who depends on the Forex for his immediate financial needs, is likely to prefer short-term certainty. Thus, choosing the longer term trends, though more profitable per trade, would introduce an unnecessary amount of dependence and pressure on each trade and create a mismatch between the time the trades are completed and his immediate cash flow needs. Taking advantage of the short-term trades, however, gives him more opportunities to meet monthly living expenses in a timelier manner. Although this trader’s profitable short-term approach also requires a certain degree of accuracy, the greater frequency of trades allows him to recover from losses much quicker.
In a similar vein, Keynes` preference for the short-term related to the fact that the immediate effects of high unemployment on individuals had to be addressed. This contrasted the view of the Classical Economists who believed that the markets, if unhampered after a recession, could reduce or eliminate the unemployment associated with the business cycle. While this hands-off approach was deemed to be appropriate during normal business cycles, Keynes view was that a recession required a more aggressive approach given the greater level of short-term dislocation. With the current global crisis still posing problems especially for the Eurozone, a full-time trader is also unlikely to trust the long-term to meet his needs given the constantly changing outlook for the underlying economies of the major currencies.
The following examples of recent currency movements highlight the growing uncertainty in the Forex market and a preference for short-term targets. These currencies appeared to have had a strong probability of going in one direction for the long-term, but either changed direction or started to move sideways. By taking smaller profits along the way, the trader captures more profit going short or long with greater certainty and avoids unexpected pullbacks in the long-term direction.
This currency had recently given a strong bearish signal to indicate that it would continue the breakout from the large Weekly and Monthly Pennant. This was expected to lead to declines below the current Support area of 1,3000 as part of the long-term trend in favour of the Canadian Dollar. Instead of this decline, the market has been in another period of consolidation on the Daily Chart, providing 3 profitable short-term trends of at least 350 pips in duration. Several opportunities for 100-Pip trades or smaller presented themselves within these trends.
This unexpected sideways movement has also been seen for the USD CAD pair. Following a break of both the Uptrend Line and the Pennant on the Weekly Chart, the long-term forecast was for a continued decline for the rest of 2012. Even if this were to materialize, the consolidation formed on the Daily Chart has provided several short-term trades between Support and Resistance as ` compensation´ for the time that it is taking for the long-term trend to continue.
In the case of the GBP AUD below, we also see that unexpected changes in the trend can be traded when the focus is on the near-term. A long-term trader would have expected the breakout from the Weekly Chart´s Pennant to have lasted a lot longer given the size of the Pennant and would have been surprised by the change in direction that followed. This trader may also have held on to the trade even as it started to pullback, believing that the market would eventually turn bearish in the direction of his forecast.
However, he is
likely to have either lost on the trade or exited at a smaller than anticipated
profit. The full-time trader on the other hand, would have traded both short
and then long without regard to the continuation of the breakout short, paying
closer attention to the signals that indicate an imminent change in direction.
While long-term trends can be a great way of making money without the need to trade frequently, this can be too risky for full-time traders with monthly monetary targets. Given the current context of stagnant global growth and uncertainty, unexpected changes in trends and the formation of consolidation patterns are now more frequent than long-term trends. Therefore, taking advantage of near-term volatility will prove to be more beneficial until the long-term economic picture becomes clearer.