This section explains the guidelines, how to determine the holding period in Forex, and what to keep in mind.
It is important to know whether your investment style is for short-term holdings of a few minutes to a few hours or for long-term holdings of a few weeks to a few months.
First, check to see if there are any rules regarding the forex holding period. Then, check the following items to determine the holding period.
- The concept of opportunity loss
- Investment style from day trading to long-term trading
- The time frame used
- How to check and control with backtesting application
- Swap points
Forex Holding Period Rules
As a rule, there is no limit to the forex holding period. In other words, there are no legal restrictions on forex positions, so you can hold as long as you want.
It is not a matter of course that there is no limit, but there are some limits such as 6 months for stock margin trading and 1 year for commodity futures. (It is possible to hold a position again through rollover.)
Therefore, as far as FX is concerned, it is advantageous for traders in that they can freely decide the holding period.
Now, let’s review the following items to consider the holding period guidelines.
The concept of opportunity loss is important when considering the holding period.
As an extreme example, let us assume the following market conditions. In such a case, profits will differ greatly if you hold the stock too long or if you repeatedly buy and sell in a short period of time.
In other words, if you hold too long, you
are losing trading opportunities that could have been profitable.
This is the concept of opportunity loss.
The above is an extreme example, but when you want to operate a trading rule that generates profit by converging expected values through repeated trading in the short term,
unexpectedly long holdings may cause opportunity losses and you may lose the profit you originally could have taken.
In addition, those with limited funds need to be especially careful about opportunity losses.
If you hold one currency for a long period of time, you may miss an opportunity to buy or sell another currency because you do not have enough funds.
This kind of opportunity loss occurs unless you have ample funds. Therefore, you should avoid holding a currency longer than expected and cut your losses if necessary.
Short term or long term?
The recommended holding period differs for each trading style.
Trading styles can be divided as shown in the diagram below.
The methods can be divided into two categories: forward and reverse. In this article, we will focus on the time scale regarding the holding period.
For the shortest day trading, the holding period can be from a few minutes to a few hours, but never more than a day.
In the shortest case, the holding period can range from a few hours to a few days, in the medium term it can be several weeks, and in the long term it can be over a month.
Be sure to be aware of which trading style you are establishing and whether the system trading rules you are developing are for short-term, long-term, or even day trading.
Once you have decided on a trading style, decide on the time frame you will use.
The approximate time frame is shown below. However, this area may vary from person to person.
- Day trading → 1 minute, 5 minutes, 15 minutes
- Short-term→5-minute, 15-minute, 30-minute, 60-minute (1-hour)
- Medium-term→1 hourly, 4 hourly, daily
- Long-term → daily, weekly, monthly
The important thing is to decide the holding period according to the time frame.
It is undesirable to hold for several days or weeks, even though you are using the 5-minute time frame.
For example, if you decide to enter a market on a 5-minute golden cross, you should consider the holding period on a 5-minute scale. Therefore, the holding period should fit into units of minutes to hours.
developing 5-minute system trading rules,
make sure that the holding period is a few hours for day trading, and
conversely, when developing 1-hour rules, make sure that the
holding period is a few days for
short- to medium-term trading.
Checking with the Contra app
In the Contra backtesting application, you can check
- Minimum/maximum holding period
- Average holding period
- Distribution of holding period and profit/loss
You can easily check
In the distribution of holding period and profit/loss chart, the vertical axis is profit/loss (yen) and the horizontal axis is holding period (h).
For example, if you look at the difference in the distribution between the 5-minute and 1-hour time frames, you will see that the holding period is a few hours in the short term and a few days in the medium term, as shown here.
Also, we can see that trades that are profitable are often those with long holding periods, while strategies with holding periods that are too short are those with many losses.
In this way, you should also pay attention to the holding period of the strategy you have created.
If the holding period cannot be adjusted too much, use a combination of time stops to control the holding period.
When considering the holding period, it is important to understand the swap point that you should pay attention to.
Swap points are calculated based on the holding period (number of days).
As shown above, in the case of Turkish Lira/Yen, 1 lot (=10,000 currency) earns 61.75 yen per day.
Therefore, there is a
big difference between a short-term, 1-day position and a long-term, 3-month position:
61.75 yen and 5557.5 yen.
However, the currencies that generate large swap points are limited to trading with minor currencies such as the currencies listed below.
Therefore, when dealing with common currencies such as USDJPY, you can expect almost no swap points.
- Turkish Lira/Yen
- Mexican Peso/Yen
- South African Rand/Yen
Minor currencies are subject to large price fluctuations, and losses may increase due to distraction from swap points, so be sure to include market gains and losses.