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 TRADING



 



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.



 



EURO CAD



 



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.



 



 WEEKLY CHART



 






 



DAILY CHART



 






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.



 



WEEKLY CHART



 






 



DAILY CHART



 






 



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.



  



WEEKLY CHART



 






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.



 



CONCLUSION



 



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.