Holding a long term position is like investing in a business. You keep it open for as long as it’s profitable and expand when things go well. During a recession you remain optimistic, but cut your losses, and when it’s finally time to admit defeat you move on, looking for a new business opportunity elsewhere.

 To open a business, you need initial capital and a plan of action. You should always remember that even the best plan may not work out and therefore you should never invest in one business alone.

 According to some statistics, as many as7 out of 10 businesses close within 5 years of opening. A good entrepreneur knows how to spread his investments to end up in profit, even if just 3 out of his 10 businesses succeed. He does so by applying a predetermined money management plan.

 Money Management

If 3 successful businesses return $30,000,000 each in the course of a certain period of time, while 7 failed enterprises lose $10,000,000 each, there is still a $20,000,000 net profit left to count.

 The numbers above can be replaced with any figures; the important point is that the ratio between risk and reward is favorable towards the reward. You can asses risk and reward by analyzing past performance and speculating on the future. A good analyst will be right enough times to remain profitable for as long as he sticks to his money management plan.

 It is advisable to have the risk reward ratio set somewhere around 1:2 and some traders would even consider a position to be worth entering at no less than a 1:3 ratio. If your current analysis doesn’t show the potential you seek, it’s best to avoid the trade and wait for the opportunity, it will come.

For example:  If your analysis suggests that over the course of a period of time, the market may move 400 pips in one direction, while possibly moving 200 pips in the other direction, it could be considered a good time to enter, unless you have good reason to believe that a better point of entry exists.

Leverage (aka risk/reward on the platform)

Because long term trades are meant to be kept for, well, the long term, it’s important to understand what leverage really means to you.

 It can be said that the leverage you choose determines the amount of pips the market has to move against you, before you lose the entire amount invested.

 Here is a table that demonstrates the amount of pips a position can hold before closing at a complete loss, as a function of leverage:

For example: When holding a position with x50 leverage (regardless of the invested amount), the market has to move 200 pips against you before all of the investment is lost. The same movement in your direction would mean doubling your investment. That would be a move from 0.9000 to 0.9200 as an example.

* The longer the trade is kept open in a trending market, the more the market is likely to move. Long term traders prefer to use smaller leverages that allow them to stay in the market for as long as their timeframe and analysis require.

 Maximizing Profit, Minimizing Loss

Just like in Business, when the market is going your way it’s a good idea to expand. A 1 pip movement can be worth any amount of dollars, depending on the size of the position. There is no reason to gain less than you could. If the direction remains favorable, it might be a good idea to open another position in the same direction.

 The same rule applies when things go wrong. You may want to reduce your exposure and close some of the positions you hold in that direction.

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