Low Frequency vs. High Frequency Forex Trading

Forex (currency market) is the largest financial market in the world, currently trading $4 trillion daily. These trades happen 24 hours a day, 5 days a week; making it one the most attractive markets for traders. This has led to two types of traders: lower frequency traders with a long-term perspective, and high frequency trader who have an intra-day perspective.

Low Frequency Trading

Low frequency trading involves a trader or an investor taking a long-term perspective in a forex pair(s) and holding that decision for a long period of time. This time period lasts for months, a year, or even more. This strategy is usually taken by professional investors such as hedge fund managers or those who do not have time to be monitoring trades –such as the average John Doe.

Basic strategies used for low frequency trading involves the use of technical analysis with long period charts, such as those which show months and years. Carry trades are one of the most famous strategies; these involve using a pair which provides the most interest rate to the investor. Macroeconomic perspectives and geopolitical forces are also used for low frequency trading.

High Frequency Trading

Intra-day trading is the more famous of the two in the forex market. Traders usually use charts ranging from a tick, 1, 5 and 15 minute ranges. Scalping is common, involving frequent trades which take a profit of a pip or less. Others follow small trends, oscillations, or trade on daily market news. While these profits are minute, traders use leverage ranging from 1:2 to 1:500 to amplify their gains and losses.

Which is better?

Statistics: this question largely depends on the strengths and weaknesses of the trader, but statistics show that high frequency traders make far less profits than low frequency ones.

 Market noise: the forex market involves trillions of dollars of trades every day, most of which are done by large organisations conducting their business and not following market trends. This produces a lot of senseless noise which cannot be understood by traders. When one takes a long-term perspective, market noise is reduced and strategies (especially those involving technical analysis) become more robust.

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Stress: if you are a trader who does not want a lot of stress, low frequency trading is for you. Those who watch markets all day can watch their trades suffer heavy losses and experience high profits, and become concerned by it.

 Gambling effect: there is a large consensus that trading can become as addictive and destructive as gambling, and this is largely true for high frequency trading. You can watch your trades double or triple in size within seconds or minutes, and soon you will try to get those gains again and again.

Spreads: this is perhaps the most important reason why one should prefer quality trades over quantity trades. Whenever you execute a trade, your broker takes a spread (usually between 0.5 to 2 pips for major pairs). High frequency traders are usually chasing a few pips, so every time they close a trade they give up a significant part of their profits. This also results in losses as many trades become impossible to execute. If you are trading long term and aiming for 100-200 pips, 2 pips would hardly be 1% of your profit.

However, this is largely up to you and your abilities as a trader. But considering the pros and cons of each, it is best if low frequency trading is done.