Long-term Forex strategies: description and examples
Long-term strategies: secrets of earning on Forex in the long term
Long-term forex trading strategies and their classification. Principles, features, advantages and disadvantages of long-term trading. Practical examples of long-term forex strategies and indicator templates for MT4
Long-term strategies are the type of trading in which positions are open for longer than 24 hours and the time interval D1 (1 day) is used for analysis. Signals occur rarely and the target profit in one position is relatively small. But in return, the trader gets the opportunity to slowly assess the market situation, close the unprofitable position in time, and avoid constantly monitoring the trade on the computer (there is some room for experiments with advisers). What else is interesting about long-term Forex strategies and what kinds are there? You will find out in this review. Also here you will find links to unique combined indicators for MT4 and examples of their application.
Long-term strategies: secrets of earning in the long term
When trader hear the words “long-term strategy”, for some reason, many get a stereotypical association — these are positions that can be in the market for days or even weeks. This is only partially true, because what matters is not the duration for which a position is opened, but the time interval used. In this review you will learn:
- What are long-term strategies and what to look for before you start using them.
- Advantages and disadvantages of long-term strategies.
- The best trading instruments and the risks of long-term strategies.
And of course, you will get examples of simple and complex long-term strategies. Although not all of them may be effective without question, they can be used as a basis and a trading simulator.
Description and examples of long-term Forex trading
In Forex theory, you can find several classifications of strategies in terms of duration:
- Short-term strategies (up to one day) and long-term strategies (over one day). The swap acts as the boundary.
- Strategies based on the timeframe used:
- M1-M5 — scalping.
- M15-H1 — intraday strategies.
- Н1-Н4 — medium-term strategies.
- D1 and above — long-term strategies.
It seems to me that both classifications are not entirely correct. In the first case, there is no medium-term trade, although there are separate technical analysis rules for it. In the second case, it’s not so clear either: if the position is open on the interval D1 and closed on the same candle, then it falls into the long-term category, although it is in fact intraday. Or if with H4 interval a position is held longer than 6 candles in the market, what type is it? In the practical examples of strategies below, long-term strategies will be understood as those that are based on the analysis of daily timeframes and which are held in the market for more than one day.
Before you dive into trading on long-term strategies, you should mind the following points:
- Swap. Each broker has a different swap, which also depends on the type of instrument.
- Volatility. At long intervals, it actually helps, since the range of price changes should pay off the spread, swap and make a profit.
- Starting and finishing points of trends. This is more characteristic of stock markets (or CFDs on stocks), where the price trend is clearly pronounced in a single interval. For example, at the time of publication of annual reports, dividend payments, or seasonal business activity.
Long-term trading does not use leverage (experienced traders use a maximum of 1:20 leverage).
Which currency pairs are optimal for long-term trading is a rhetorical question. First of all, these are volatile pairs with relatively medium and low liquidity, i.e. exotic currencies. If the pair is highly liquid, this means that it will be instantly bought and sold, thus remaining in a narrow price range. Also pay attention to the average daily volatility, which should be at least 100–120 points. By the way, don’t limit yourself to the main currency pairs. There are also cross pairs and CFDs on futures.
Benefits of long-term strategies:
- Spread is not a relevant factor. Given the target profit of long-term strategies, spread can be neglected, as its share in the potential profit is insignificant.
- No price noise. The purpose of speculative trading is to make money on short-term price changes. On smaller time frames, the price is subject to speculative fluctuations in both directions, while in the long run it is influenced by long-term factors. For example, for securities, the payment of dividends leads to a local price surge, the growth of production and exports — to the long-term growth.
- You have time for analysis. A signal candle gives the trader a head start of a few hours. During this time, you can use wave analysis, look at the levels, analyze lower timeframes, etc. However, there is a flip side to the coin, which I will point out in the disadvantages below.
- Relatively low stress. You don’t have to be by the screen all the time. With the correct setting of stop orders, the risks are small, although sometimes you have to keep a loss for more than one day.
- Diversification of risks. When working on short-term strategies, the trader is forced to focus on a limited number of assets. Long-term strategies can be used for different instruments, while tracking correlation.
- Algorithmic trading. Advisers are just robots programmed to perform tasks according to a specific algorithm. In the case of force majeure (sudden movement), their effectiveness decreases significantly. In the long term all sharp fluctuations in the price are smoothed out, which is best for testing and applying advisers.
The optimal long-term timeframe is probably 1 day. Weekly and monthly intervals are used as auxiliary for the analysis of wave theory, seasonal volatility and annual trends.
Disadvantages of long-term strategies:
- Rare signals. In the daily timeframe, one candle is one day. The trader needs to catch a combination of candles preceding the signal in the chart, wait for the signal candle and only then open the position. Sometimes you have to wait for a week or longer.
- Swap. Unlike spread, swaps can really damage the profit of long-term positions. Even more so on the weekend, where you have to pay a triple swap. Traders prefer to close positions on the week days and certainly avoid having open positions on holidays. Since Monday is considered the most unpredictable day, and on Friday most of the traders leave the market, the peak of trading volumes for intra-week strategies falls on Tuesday — Thursday.
- Low profitability. In moderate-risk strategies, the target profit is about 100 points. This is not the limit, but compared to intraday strategies, this is not much.
- Woe from wit. Professionals often act on a hunch. Experience and intuition allow them to make quick decisions that turn out to be correct. However, novice traders see an opportunity to take some time and think when using long-term strategies. They start making up theories and find patterns that are not there. They give into wishful thinking and mislead themselves. Is it bad to think too much? Sometimes.
- Large initial capital. It is logical that a trader with 100 dollars will prefer quick earnings within a day. The expected 100 points of profit equal to only 1 dollar and you need to spend 1–3 days to earn it. In fact, this is an excellent result: if you earn 1 dollar in 3 days, monthly earnings will be $10, i.e. 120% per annum. No instrument has a return rate like this (let alone deposits). But in comparison with the daily earnings of people with standard occupation, the amount does not look impressive even if the trader spends a maximum of an hour a day on trading.
A few words about the risks. Many sources call long-term trading less dangerous in terms of risk. They say that in intraday strategies and scalping, speculative volatility is unpredictable and often breaks stop orders. In daily timeframes, the length of the stop orders reaches 30–50–100 points, i.e. local volatility is negated. However, we are talking about the risks of a position closing by a stop order triggered.
In long-term trading, a trader is forced to keep a loss for hours, if not days, and can still end up with a loss. Besides the fact that this is an emotional burden, the amount of loss will be many times greater than in intraday strategies (another argument against using leverage). Long-term strategies also bear high risks, they just have a different nature.
Whatever type of strategies a trader practices, most often several timeframes are analyzed simultaneously. According to theory, the analysis begins with higher periods and in long-term strategies, intervals 1D and higher are used as the main ones. My advice: in order to avoid switching between windows with different intervals, use scripts or multi-timeframe indicators (they all have MTF prefix in their name). They are quite convenient — they display the summarized information at several intervals on the screen (in the main timeframe).
Five long-term Forex strategies
The strategies below are interesting in that beginners can use them too. They are built based on combined indicators with links to templates for each strategy. Copy the archive, add the strategy template and indicator to MT4 and follow the recommendations. Read more about how to add indicators in MT4 in this review.
1. Daily strategy for the Sentiment indicator
Sentiment is a trend indicator that shows quite well the prevailing mood on the market. If it is in the upper (positive) zone, bulls prevail, if in the lower zone — bears. Indicator settings:
- eriod = 13. Number of candles taken into account.
- Mode = Fast. There are three construction methods in the settings: slow, medium, and fast. With fast construction, the calculations will be less accurate, but lag will be eliminated.
- Number of bars to display = 0. Number of bars displayed simultaneously. If the value is “0”, the indicator draws histograms over the entire history of quotes loaded into the platform.
The indicator is located at the bottom of the chart. In one of its versions, a linear display of the result is used, but it is not quite convenient. This link allows you to use its second version, which displays calculations as multi-colored histograms. Strategy timeframe — 1 day, currency pair — GBP/USD.
Conditions for opening a long position:
- The indicator draws at least five red bars below level zero in a row. Moreover, each of these bars has to be longer than the previous one in absolute value. This indicates a growing bearish trend.
- After the formation described in the previous paragraph has formed, we are waiting for the bar, which will be shorter than the previous one in absolute value.
We open a position on the next candle after the second condition is fulfilled.
For visual convenience, the indicator highlights each subsequent growing bar with a thicker line. And if the next bar is smaller, then the bar line is thin. If we see a bold red line in the chart — bears are prevailing, if the red line is thin, then bears are prevailing but their strength is gradually decreasing (i.e. the volume of long positions is going down). It works the same way with the blue lines and bulls.
In the screenshot, you can see the formation of 5 bold red lines building, each longer than the previous one. As soon as a thin line appears (the bar is shorter in absolute terms), we open a position. In the chart, the signal candle is highlighted with a pink rectangle.
It is important that the so-called “staircase” contains at least 5 bars, the more the better. Stop Loss is selected individually for each pair. For GBP/USD, it is better to place the order at a distance of 100–150 points, aiming around the local lows of the previous day.
In the screenshot, the red lines indicate the following (top to bottom): Take Profit, position opening level, Stop Loss. At the Take Profit level, you can close only 50% of the position and secure the remainder with a trailing stop. But this is up to the trader.
To exit the market, we use a trailing stop. We set it at the level of 70–100 points and go do something else.
Conditions for opening a short position:
- The indicator draws a minimum of five growing blue bars above level zero. The essence is the same: each subsequent bar should be larger than the previous one.
- After this condition is fulfilled, a bar smaller than the previous one appears.
On the next candle, open a deal.
Here you can also see the formation of a bullish pattern. When its strength starts to go down, you can open a position. The top horizontal red line is the Stop Loss, then there is a line of the position opening level and the bottom line is Take Profit.
The strategy is convenient in that you do not need to be at the screen all the time, but signals appear rarely. Therefore, you can use it for several pairs at the same time, after selecting the length of the stop order based on volatility (use the volatility calculators or put the ATR indicator in the weekly chart). The effectiveness of the signals is clearly visible on the history of quotes, i.e. without the use of a tester.
2. Gaussian Filter and the theory of normal distribution of probability
Although the attempts to filter price noise and solve the problem of lagging indicators by averaging are considered the most convenient and popular, they are not particularly effective. In more complex indicators, attempts have been made to apply statistical methods and higher mathematics formulas (one such method using spectral analysis and the Fourier series is described in this review).
Another example of such a combined indicator is the Gaussian Filter, which is built on the normal distribution of probability method (Gaussian distribution). The indicator draws a line with dots of different colors. Blue dots mean that the acceleration of the market is directed up, red mean that the acceleration is directed down.
I don’t think that we need to go deep into the essence of the formula used in the indicator code. So just download it here, install it in MT4 and test it. Despite the relative rarity of the signals, most of them are effective. Recommended timeframe — 1 day, currency pair — EUR/USD, Gaussian Filter period — 12.
Conditions for opening a long position:
- In the chart, the indicator draws a descending section with a red line, which has at least five red dots.
This is the only condition. On the next candle, you can open a position with a stop order at about 150–200 points and with a target profit of about 100 points.
If the candlestick closed above the moment the position was opened but did not reach Take Profit and its body was more than 30 points, then move the stop order to the breakeven level. If the body of the candle is shorter than 30 points, leave the stop order at the same level. If the next candle goes down, in the worst case, the position will close at zero profit.
The screenshot shows that after entering on the signal candle, Take Profit is triggered on the third candle. It’s a controversial question whether you should set a trailing stop. Due to the volatility of the pair, trailing stop may be triggered earlier than Take Profit. However, this is up to the trader.
Conditions for opening a short position:
- In the chart, the indicator draws the ascending section with a blue line that has at least five blue dots.
The conditions for opening a position on the next candle are similar. The Stop Loss length here is nominal, as the trader has enough time on the daily interval to assess the situation by lowering the timeframe and using classic indicators. The probability of major movement in the opposite direction is small.
Here we also close the position on the third candle by Take Profit with a profit of about 100 points.
Positions are opened at the end of a strong movement towards a reversal, so the potential loss will be a consequence of the inertia of the price and it is better to wait it out.
3. Prediction of price ranges with DRP2
The DRP2 indicator is one of the leading forecasting tools. It analyzes the range of price fluctuations of the last candle, combines them with the High, Low, and Close values of the current candle and, based on the calculation results, draws the forecast location of the next candle a little to the right. The final forecast range is drawn after the current candle closes.
The indicator’s author Thomas DeMark says traders should pay attention to the following points:
- DRP2 is intended only for the daily interval, since it uses data from only one previous candle. But at the same time, it recommends using smaller intervals as auxiliary timeframes.
- This is a trending indicator. When a growing daily candle appears, one should assume continued growth the next day. However, in accordance with the wave theory, any growth is followed by a decline. Therefore, it makes sense to add indicators that measure the strength of buyers and sellers (Bulls & Bears), analyzing the ratio of the number of requests and volumes of both sides.
- The indicator does not work at the time of news release, abnormal high volatility, or in case of force majeure.
According to traders, the indicator is ambiguous, but it shows the best results on the daily interval. Day candles are associated with the sequence of operation of exchanges, strong and weak daily activity, etc. And while on short timeframes, different brokers sometimes have different opening and closing prices for candles on the same section, on daily intervals one can see clear patterns. However, this is just one of the opinions to discuss in the comments.
The recommended currency pair is EUR/USD, the indicator settings need no adjustment, and you can download the template here. There are in fact no settings (the formula is already built in the code), except for the number of bars in the history. You can view the history, but it is better to use the MT4 tester.
Conditions for opening a long and short position:
- Wait for the close of the daily candle (00.00 Eastern European time).
- Place the following orders:
- Buy Limit — on the level of the lowest value of the range, if a new candlestick opens at a price closer to the highest level of the range.
- Sell Limit — on the level of the highest value of the range, if a new candlestick opens at a price closer to the lowest level of the range.
We calculate the stop loss level using the following formula: (Max + Min)/2, i.e. subtract the lowest price from the highest price of the range, divide the result by two. The target profit is 100 points, after which we close 50% of the position and secure it with a trailing stop. If the range is less than 50 points (i.e. although the trend is strong, there is a probability of slowdown), we do not open positions.
In this particular case, a suitable candle is shown by a vertical arrow. To the right of it, a range (purple rectangle) was formed using the indicator. Its center is indicated by a yellow dot for convenience. The candle is growing (white), but its closing price is below the middle of the violet range (if in doubt, right-click on the range, click on “Rectangle Properties”, look at the values of the range’s borders and compare them with the closing price of the candle).
Since the closing price of the candle is closer to the lower edge, we place a pending Sell Limit order at the top of the range (central horizontal red line). The top line is Stop Loss and the bottom one is Take Profit. Pay attention to the next black candle with a long body. Its upper shadow triggers the pending order in accordance with the forecast of the indicator and the position closes on the same candle. If this candle did not reach Take Profit, we would close the position manually in full.
Do not enter the market under the following conditions:
- On Monday. At this time, a price gap might form, which damages the indicator results. In the screenshot, we see the gap immediately after the black candle on which the position was closed.
- If the high minus the low of the range is less than 50 points.The strategy seems complicated at first glance. After a while, you will start recognizing the candles, on which pending orders can work with moderate volatility.
The strategy may seem complex at first. Some time later, you will be able to very quickly identify the candlesticks where pending orders may work out with a moderate volatility.
4. Profitable trading with SL_ATR
ATR (Average True Range) is one of the popular basic indicators. Based on the analysis of previous candles, it shows the volatility of the market. This is the average parameter of the movement of the instrument per unit time. There is an interesting comparison in trader circles: ATR is the gas consumption of your car, which depends on the timeframe (time on the road), type of engine (trading asset) and driving style (speed of price change). You can read more about it here.
SL_ATR is a combined indicator that builds values in accordance with the ATR formula, but it also shows stop levels for positions in both directions. It has several versions. In the one on the MQL developer’s website, the boundaries of the clouds are constructed in the chart, which are the lowest and highest stop order values for buy and sell positions. This is another version.The modification of the indicator whose template can be downloadedhere is rather an arrow indicator
- Important! This strategy is not recommended for novice traders. In addition to knowing the principles of trading on pending orders, you must also be able to evaluate the market according to various criteria. The strategy is complex and it is not quite sufficient to just follow the algorithm below. The idea of entering and exiting the market is given as an example of the non-standard use of a standard indicator. If you have any ideas on how to improve it, I would love to read about them in the comments.
This strategy basically involves earning on a position reversal at the time of rebound off of the stop. I.e. stop orders are not placed based on the indicator, but you trade on a breakdown of the red and blue arrows marking the levels.
Conditions for opening a long and short position:
- Set pending orders based on the following principle: set Buy Limit at the level of the last blue arrow, Sell Limit at the last red arrow.
This is the only condition. Set the stop order at a distance of 30–40 points.
Since the example is reviewed based on historical data, we take one candle that has blue and red arrows as a basis. The levels for pending orders are indicated by yellow circles in the screenshot. You can also see that one of the orders (Buy Limit) was touched by the price.
There are two options for closing a position:
- If the current candle made a profit of 100 points, we use the classic risk diversification technique. We take 50% of profit and secure 50% with a trailing stop at a distance of 30 points. In the event of a connection failure (trailing stop is disabled in this case), we also set a stop loss at the same level (30 points from where we took profit).
- If the closing price of the current candle differs from the opening price of the position by more than 30 points, we also close 50% of the position and secure it with a trailing stop at 30–70 points.
If a Stop Loss is triggered (the price has gone in the opposite direction), we immediately reverse the position with a new fixed stop order at 30–60 points. As testing the indicator on history shows, the stop order is triggered only in case of a strong movement. In other words, if the first position turned out to be an error, when the price passes 30 points (length of the stop order you will be able to say with confidence that this is not a correction, but rather a strong movement. Therefore, we simply open a position in this direction.
In fact, trading on SL_ATR involves two strategies: opening a position at the end of the level and opening of the opposite position in case of breakdown of the same level (price reversal). You can test the strategy on other pairs, choosing the stop order level depending on volatility.
5. Trading on candlestick formation and the Stochastic
The daily timeframe is itself part of the strategy, as it eliminates local corrections and inertial price movement. In this strategy, you follow a proven path — use classic candlestick patterns, evaluating overbought and oversold zones using the Stochastic. When you have found the optimal settings and obtained the skills of recognizing the pattern, you will get a good result.
This strategy involves trading on a rollback after a strong movement (deep correction) or during a change in the main direction. Timeframe — 1 day, asset — EUR/USD. Parameters of the Stochastic oscillator: %K = 5, %D = 3, Slowdown = 3, Price — High/Low, Method — Simple MA (Simple), Levels — 20 and 80.
Conditions for opening a long position:
- A pattern appeared in the chart consisting of 4 or more falling candles, the body of each is at least 20 points.
- On the last candle, the Stochastic is below the 20th level (in the oversold zone).
- A growing candle appeared.
After the growing candle closes, open a position. It is also important that at this moment the Stochastic reverses and starts to leave its zone. We set a relatively small stop order — less than 100 points. For example, 10–20 points below the local low.
We observe the candle on which the position was opened, we wait for it to close in growth. Then we move the stop order to the breakeven level and take 50% of the position. You can add a trailing stop.
The screenshot shows that on the first growing candle, the Stochastic is below the 20th level and its lines are turned up. On the candle indicated by the arrow (pink rectangle), the Stochastic leaves the oversold zone, we open the position. At the close of the daily candle, we take 50%, secure the remaining 50% with a trailing stop, and also in the event of a connection failure, we move the stop order to the level of position opening.
Conditions for opening a short position:
- Wait for the appearance of 4 growing candles with a body of at least 20 points each.
- Watch the Stochastic. On the last growing candle, it should be in the overbought zone, i.e. above the 80th level.
- A falling candle appeared.
After the falling candle closes, open a position. We exit the market in a similar way: we wait for the close of the candle on which the position was opened, close 50%, secure the rest with a trailing stop.
Please note that in this case, the Stochastic has already moved out of the overbought zone on the signal candle. This is a leading signal, but it can be taken into account. There is a risk of the Stochastic returning back to the “0–20” zone, therefore, the leading signal can be helpful for the trader. You can test this for different pairs on historical data.
The strategy will be interesting for novice traders. Although signals appear frequently, there is time to double-check them. The conditions for opening trapositionsnsactions are basically unambiguous. There is controversy regarding the angle of exit of the Stochastic from overbought and oversold zones, which determines the signal strength. But after the signal candle closes in the opposite direction, the probability of error decreases sharply. To develop professional trading skills, you can add Fibonacci levels, indicators of resistance and support levels, and wave analysis.
Conclusion. Long-term strategies can be applied to both the foreign exchange and the stock or commodity markets. On larger timeframes, basic patterns are clearly visible, therefore, building strategies on them is considered a simpler task compared to intraday tactics.
However, this is not for everybody. There is no rush, less emotion and excitement. In order to use the long-term strategies successfully, a trader requires patience and endurance, while many prefer speed trading and instant results. But who said you cannot combine scalping with long-term trading? You can, and switching to daily charts will be a kind of relaxation. So go ahead, download the templates, test and share your opinion on the effectiveness of the proposed strategies in the comments. Good luck!
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Originally published at https://www.liteforex.com.