What is medium-term trading and how does it work?

Contrast this with shares, where daily price movements may be smaller than in some currency pairs, although volatility varies by market, company and period. In that context, a day is not always considered a long holding period.

So, when you’re thinking about time frames, it’s important to remember that the number of days/months can vary based on the security you’re trading. Having said this, there are some periods of time that traders will consider depending on when they’re using a short-term, medium-term, or long-term strategy.

Short-term trading

Short-term trades are usually held for a day but not more than a week. In some contexts, such as the forex market, short-term trades can be measured in minutes.

For example, scalping is an intraday trading strategy that aims to capture small market movements over very short periods. Scalpers enter and exit positions multiple times within the same day, sometimes within minutes or seconds.

Short-term trading can also include positions held for a few days or up to a week, depending on the instrument and strategy. Whatever the specific time frame is, the point to keep in mind when it comes to short-term trades is that you’re not aiming to hold a security for very long.

The aim is to enter and exit positions quickly to respond to short-term price fluctuations. Because of this, some traders use technical analysis, which looks at past and present price data.

Medium-term trading

Medium-term trades are typically held for several days, weeks or sometimes months, depending on the instrument and strategy. In forex, holding a position overnight may already move away from very short-term trading, while medium-term positions in shares or commodities are often held for longer than a week.

Medium-term trading may require less frequent monitoring than some short-term trading strategies. Capital needs depend on the instrument, position sizing, leverage and risk controls, and can vary across strategies.

This is because you’re not trying to capitalise on volatile markets by moving into and out of multiple positions per day. Similarly, you’re not tying up capital for long periods of time like you would with a long-term strategy.

You can also take a mixed approach to analyse the markets. Because you’re basically straddling the line between short and long-term trading, you can use technical analysis and fundamental analysis.

The former could help you identify potential trade setups and possible market movements in the coming weeks or months.

The latter helps you establish the fundamental value of the asset and its potential regardless of market conditions. This can help you determine whether it’s worth holding for a meaningful period of time.

Long-term trading

Long-term trading could be defined as any length of time that’s longer than a mid-term trade. However, if we’re going to be a bit more specific, longer-term trades usually require you to hold securities for months or years.

Again, context matters. Long-term forex trades could mean holding positions for a month. With stocks and commodities, you could hold positions for 10 years. The main thing here is that long-term trades are held for extended periods, and sometimes you’ll hold them indefinitely.

For example, some investors might hold shares in a company because they believe its fundamentals could improve over several years. Some of them may also choose to hold through short-term fluctuations, but there is no guarantee the company will succeed or that the share price will rise in the future.

This line of thinking means that fundamental analysis can be more useful than technical analysis. Because technical analysis uses past and current price changes as the basis for buy/sell orders, it doesn’t have as much relevance when you’re looking at the overall value of a security.

Overall, long-term traders usually focus on fundamental factors, such as financials, industry and valuation.

How to choose your time frame

The time frame you choose will depend on a variety of factors, some personal and some technical. For example, traders with lower tolerance for short-term volatility may prefer longer time frames, but the right approach depends on the product, objectives and risk capacity.

If you’re trading in a volatile market such as forex, holding a position for a year might not be suitable. So, you might need to consider what you want to get from trading and the securities you’re trading.

Different approaches are possible, and some traders use more than one time frame. The right approach depends on knowledge, experience, risk tolerance, available time and the instruments being traded. For example, if you want to create a diverse portfolio which utilises medium-term and long-term trades, that’s fine. However, before you make these decisions, you need to ask and answer these types of questions:

How much starting capital do you have? The amount of available capital affects position sizing, diversification and the ability to absorb losses. Smaller accounts may be more vulnerable to costs and volatility, especially when engaging in frequent trading or using leverage.

How much volatility are you willing to accept? In general, short-term trading can be more volatile. Some short-term trading strategies, such as swing and scalping, actively rely on volatility. All time frames can involve volatility, but short-term trading can be especially sensitive to intraday price swings, spreads and trading costs.

How much time do you have? Medium- and longer-term positions may require less frequent monitoring than short-term trades, although they still need regular review because market conditions can change. This isn’t possible with short-term trading. Some strategies require you to make multiple moves per hour, which means you constantly have to focus on price charts.

What are you going to trade? Some securities are better suited to short-term trading, while others are more suited to long and mid-term trades. Some securities that medium-term traders tend to focus on most are stocks, commodities, and ETFs.

There are no strict rules on what you can and can’t trade using a certain strategy. As we’ve said, you could use a long-term strategy in forex. Similarly, you might want to trade stocks using a short-term strategy if the market is volatile. However, these are exceptions to the rules.

Medium-term traders often look for instruments with sufficient liquidity and price movement while avoiding products whose volatility is difficult for them to manage.

How a medium-term trading strategy can be planned

The steps below outline points traders often consider when planning a medium-term strategy. They do not guarantee profit and should be assessed against risk tolerance, product risk, costs and available capital:

1. Choose the instrument you want to analysis

Where available, a broker’s demo account can be used to practise in a simulated environment without risking real money. Demo trading does not allow you to make cash profits, and fills, pricing, liquidity, and psychology can differ from those in live trading. Educational trading guides can also help explain how different markets work.

2. Decide whether to fund a live account

If you decide to make real-money trades, the amount deposited should stay within limits you can afford to lose. It should also reflect product risk, costs, margin requirements where relevant and the number of positions you plan to hold. Holding multiple medium-term positions may require enough available capital to avoid being forced into decisions by short-term movements.

3. Do your research

Research is an important part of the process. It can be useful to assess the instruments you are considering before opening a position. This research should combine technical analysis and fundamental analysis. Technical analysis looks at recent price data and chart patterns (formed through price movements).

Fundamental analysis looks at the core qualities of the asset you’re trading. For example, if you’re trading stocks, you might need to look at earnings reports, current market conditions, company updates/news, and analyst estimates.

The aim is to bring this information together to assess whether an instrument fits the strategy, what risks it carries, and what holding period may be appropriate. Analysis may also help traders consider whether they have a long or short view.

Going long means taking a buy position because you expect the instrument’s value to rise. Going short means taking a sell position because you expect the instrument’s value to fall; remember that short selling and some short products can carry significant risk and may involve losses greater than the initial amount invested.

4. Set your time limits

After analysing the instruments being considered, it can be useful to set a general holding-period range. This range may change based on market conditions, but it gives the strategy a clearer structure before a position is opened.

5. Open and monitor positions against your plan

After opening positions, traders may use risk-management tools such as take-profit and stop-loss orders. These tools could help you define exit points, but they may not execute at the expected price in fast markets or gaps.

A medium-term plan should include the reason for the trade, the expected holding period, the risk limit and the conditions that would lead to closing or adjusting the position. Reviewing the plan could help you distinguish normal short-term movement from information that changes your investment case.

Market conditions can change, so a plan should not be followed blindly. The aim is to avoid reacting to every short-term move while still reassessing your positions when new information, costs, risk limits or market conditions justify it.