High-Frequency Vs. Low-Frequency Forex Trading

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The number of trades that you close as a forex trader on a single day depends on factors such as your strategy and the timeframe in which they actually trade. Inexperienced traders typically use shorter timeframes due to the reason that they always look for faster trading actions. However, this is fraught with a large number of disadvantages. Longer time frames have a greater number of advantages and some of these are discussed in the paragraphs below. In general, the two main types of trading frequencies that are seen in the forex market are 1: High-frequency and 2: low-frequency trading. Read on to have a better understanding as to what they actually are and how they impact your trading.

High-Frequency Trading

High-Frequency Vs. Low-Frequency FX TradingAs the very words may sound, this term does not reference the high number of trades that are placed in an automated trading environment, but the multiple numbers of trades that are placed by human traders on short-term trading charts. This is commonly practiced by most retail traders currently in the market. Many falsely tend to believe that placing more trades in the market helps them to earn more money in a short period of time. In forex trading, however, this is not actually the reality. Statistics often lend credence to the fact that you act with better judgment when the time intervals are short. During such times, the trader tends to close a larger number of deals successfully. If the trader stares at the charts for too long, then the following possibilities may occur:

  • You tend to overestimate your thinking capacity and technical expertise
  • You may end up using the margin and leave very little space for trade opportunities that have a high success probability in the future
  • You do not allow the right amount of space for the right opportunities
  • You mistakenly see the wrong opportunities as the right ones by making them up
  • You tend to chase the market and overtrade in order to make up your losses

All of these would work to your disadvantage. They lead to losses and these reasons are true for over 95 percent of the forex traders. The statistics tell true stories. However, it is also true that traders still indulge in high-frequency trading the world over. The reason for this can be cited as overconfidence on the part of the traders. When the trader wins a few times, it shows up as pride and overconfidence in the trader. The trader rightfully attributes it to an increase in ability and not luck. This causes them to take more risks in the market. In such cases, when losses happen, they rub out all the previous wins. Thereafter, the trader panics, losing out more in the subsequent trades.  Soon the margin with the broker gets wiped out.

Low-Frequency Trading

This term refers to a small number of trades placed during a trading cycle. Such trades are usually constructed on daily charts but end up being more profitable. Any trader can actually construct a trade that will be closed only after two weeks. It is always more profitable to go for fewer trades that would deliver more pips per trade than go for many that give only a few pips per trade. For any long-term trader, the daily chart provides more valuable information than the short-term charts. Trends in the market are of three basic types: major trends that last for a period of more than six months, intermediate trends that primarily are corrections of the current trend in the market and minor trends that are very short-lived.

An uptrend on a short-term chart may actually be an intermediate trend on a daily chart. In such a situation, traders going long will end up losing as it presents an opportunity for the low-frequency traders to sell their assets. Large institutional investors always control the market trade volumes and small timers always blown off by them.

Why Is Low-frequency Trading Better

  • You spend less time working in front of your computer
  • You tend to trade along with the trend and chances of successfully closing trades becomes more probable
  • The trading workload is less than otherwise
  • For every trade, there are more chances of rewards than risk.
  • You end up enjoying more free time for yourself.

The R-Factor

The R-factor can be used as an indicator of the potential profit or loss in a trade. It is the money that you can make in a specific time in comparison to the trade risk (R) involved. Let us understand as to how it works through an example.

If you stand to risk $500 as stop loss in a trade the R-value can be thought of as $500. If you make $1,000 during the course of a period, the R-factor is 2 (i.e., 1000/500). The rate of return is 2R.  The R-factor is a true reflection of your performance. Trading is all about reward and risk not at all about the percentage earned. Whereas one trader would have to place 100 trades to get to an R-factor of 5, another trader may require only 10 trades. The first case is akin to taking a long and arduous route instead of a short-cut.

Above everything else, it is easier to spot the best trading opportunity when the timeframes are longer rather than shorter. Technical tools such as patterns on charts, trend lines, support, and resistance lines, pivot points, etc., present a higher success probability on longer timeframes than shorter ones. The end lesson is clear: the forex market is one that witnesses frequent trend changes and it is not a good idea to go behind the short-duration trends and miss out on the more important long-duration ones.

The Wrap-up

Any R-factor can be achieved over a time period with the help of low-frequency trading. Therefore, you should focus more on quality in order to achieve the desired R-factor. Moreover, it is important that you give more attention to removing trades off from the daily charts and perform low-frequency trading by watching the longer-term charts closely.

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