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I would like to ask 3 questions regarding trading and investing:

  1. How Is short term trading defined? and with Forex, is forex trading always short term? Meaning can't be in it for the long haul (holding on the security for a long time before selling) with forex and if so why is it?
  2. For traders that trade both equities and currencies for the short term, how do they really make money given the transaction costs (brokerage fees etc) they've got to incur every time they open and close a position?Don't these costs erode profitability?
  3. Given these questions, wouldn't it then make sense and profitable to invest for the long term rather than the short term?
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  • "short term" in what context? For US taxes it means 1 year, but from the other questions it doesn't look like you're worried about taxes.
    – D Stanley
    Mar 3 '20 at 14:05
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Short term is an ambiguous word that leaves a lot of room for interpretation. Commonly accepted trading descriptions are that day trading is the buying and selling of securities during the same day and swing trading is anything from one day to several weeks.

Yes, trading costs (slippage, commissions, margin and borrow costs) erode profitability. If someone has an edge and trades well, trading costs are just part of doing business. If they don't and they lose money, trading costs just make it worse.

Investing for the long term makes sense for the vast majority of people. For some, it does not.

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  • Thanks for the clarification. Can you plz futher clarify the first question? When trading forex, can you hold it for the long term? ie Buy a currency long and hold it for the next 2 to 3 years? Does this even make sense?? Hence I asked if currency is only traded for the short term?
    – Sjakes
    Mar 3 '20 at 20:24
  • I'm an equity and options guy so sorry, I can't help you with Forex questions. Mar 4 '20 at 0:10
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  1. If someone holds for less than 1 year then it is short term, more than 1 year holding period is long term, according to IFRS (International Financial Reporting Standards) and it can be relate to any type of investment (Real estate, stocks, bonds, FX etc). The holding period of the investor decides what is short or Long.
    But for classification purposes in finance, FX, certificates of deposit, Treasury bills etc are known as short term investments because investors hold it for less than a year or they are offered for less than a year. But if investor decides to hold for longer, then from investor point of view they become long term.
    E.g. Currency (FX) can be long-term if investor holds it for long-term. But from finance point of view they are short term because they relate indirectly to T-bills which are offered for less than a year.

  2. Yes they erode profits, sometimes known as transaction cost (TC). Often multiple transactions create negative returns only due to TC. Spread (bid-ask difference, Mathematically called Standard deviation) is very important, narrow the spread creates less pressure for returns, which helps to cover TC with a small return.
    E.g. Small investors don't invest in Hedge funds mainly due to TC, instead they use ETFs.
    In economics this concept is also called economies of scale. Small orders of trading create diseconomies of scale. Hence, create negative returns.

  3. That's why "Fama and French" argue, Passive investment (PI) is better than Active Investment (AI). In PI investor don't trade daily, they focus only on long-term after they carefully make a portfolio using Modern Portfolio theory.
    "Fama and French" conceded that good active managers will always be a part of the market. But he doesn’t think they can justify their costs. Whatever benefits asset owners receive by hiring them will be offset by the fees (TC).

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