Skeptics of buy-and-hold trading in forex argue that it is a fool's errand because currencies lack the main advantage of stocks. A company's value may soar because of an event such as entering a new market or a break-through product. Currencies, on the other hand, rarely rally against each other unless, for example, a Third World currency devalues because of political or financial turbulence.
Because of this fundamental difference between currencies and stock, many consider a buy-and-hold strategy inapplicable to the forex market. However, others consider it a viable strategy for experienced forex traders.
There are different ways to trade in most markets. Traders have been classified into three groups, primarily based on their preferred trading time frame. For simplicity, these groups can be described as day traders, swing traders, and position traders. Some people consider a position trade or buy-and-hold strategy an investment, but in reality, it is just a long-term trade.
Key Takeaways
- While currencies rarely rally against one another in the same sense that stocks do, there are viable reasons for experienced traders to engage in buy-and-hold strategies in forex trading.
- Traders who understand the long-term economic trends in one country versus another can buy-and-hold a currency for months or years in order to recognize profit from their trade.
- Buy-and-hold forex trading can also happen in conjunction with other investments, such as an American investor buying stock in a European company.
- Carry trade refers to a trader selling a currency that provides a low-interest return rate in order to purchase a currency that provides a high-interest return rate.
- Traders consider central bank policies, global sentiments, and trends in unemployment rates when adopting a long-term forex investment strategy.
Forex Market
In the forex market, a trader can hold a position for as long as a few minutes to a few years. Depending on the goal, a trader can take a position based on the fundamental economic trends in one country versus another. For example, a long-term trade in the forex market, or a buy-and-hold position, would be advantageous for someone who had sold dollars to buy euros back in the early 2000s and then held on to that position for a few years.
Suppose an American buys shares in a company in Europe, they will have to pay for those shares in euros. Thus, there is a requirement to convert dollars to euros. The American trader is speculating on the growth of the European company and also on the appreciation of the euro against the dollar. In this example, the American may benefit from an appreciating value of the shares bought but also from an appreciating currency.
Of course, conversely, had a European trader bought shares in a company such as General Motors (GM), they would have had to pay for those shares in dollars but would have lost value in both the shares and the currency during the same period.
Buy-and-hold strategies in forex trading offer long term profit potential, as well as additional profit if the trade features a positive overnight interest rate trading. Limiting factors, however, include the lack of clear entry/exit criteria, the need for patience, the potential for negative overnight interest rates, and the necessity of a broker that is reliable enough to depend on for several years.
Carry Trade
If a trader wants to buy and hold a currency, that trader could sell a currency that pays a low-interest rate, such as the yen and buy a currency that pays a high-interest rate, such as the Australian dollar. This would be considered a carry trade, where the trader will earn the interest differential between the two currencies. While the trader knows how much interest the trade will receive, the trader does not know how the two currencies will continue to perform against each other.
Most forex traders tend to be short-term traders who constantly time the market swings in the hope of profiting. Those who succeed are seeking long-term profit potential. Traders consider environmental factors such as central bank policies, global sentiments, and trends in unemployment rates. A long period of waiting is required, and many traders assume a forex buy-and-hold position that lasts for years or decades.
FAQs
Traders who understand the long-term economic trends in one country versus another can buy-and-hold a currency for months or years in order to recognize profit from their trade.
What is a buy-and-hold strategy in forex? ›
Buy and hold is a long-term passive strategy where investors keep a relatively stable portfolio over time, regardless of short-term fluctuations. Buy and hold investors tend to outperform active management, on average, over longer time horizons and after fees, and they can typically defer capital gains taxes.
Is buy-and-hold still a good strategy? ›
Yes, the Buy and Hold strategy is particularly well-suited for retirement planning. Its long-term nature aligns with the typical investment horizon of retirement planning, allowing for capital appreciation and the benefits of compounding returns over several decades.
Is it better to buy-and-hold or trade? ›
"Buy and hold can result in significant long-term capital gains, which are often taxed at a lower rate than short-term gains," says Collins. On the other hand, he adds, it may take longer for buy-and-hold investors to see returns, compared with using a more active trading strategy.
Can I buy-and-hold forex? ›
Buy-and-hold strategies in forex trading offer long term profit potential, as well as additional profit if the trade features a positive overnight interest rate trading.
What are the disadvantages of buy-and-hold? ›
The biggest drawback of this strategy is the large opportunity cost attached to it. To buy and hold something means you are tied up in that asset for the long haul. Thus, a buy and holder must have the self-discipline to not chase after other investment opportunities during this holding period.
Why is buy and hold dead? ›
Buy and hold is a good strategy for some, but as you age, risk management needs to takeover. The risks that you can face when you're younger shouldn't be a part of your portfolio later on in life when you have proper risk management in place.
What is strong buy vs buy vs hold? ›
Strong buy means analysts expect the stock to far exceed the average return on the stock market. Moderate buy means the stock is expected to outperform the overall market. Hold means analysts recommend to neither buy nor sell the stock.
Is there a 100% winning strategy in forex? ›
Trading forex is risky and complicated, and no strategy can guarantee consistent profits. Successful forex traders are those who tend to have a good understanding of the market, good risk management skills, and the ability to adapt to changing market conditions.
What is the most profitable forex strategy ever? ›
“Profit Parabolic” trading strategy based on a Moving Average. The strategy is referred to as a universal one, and it is often recommended as the best Forex strategy for consistent profits. It employs the standard MT4 indicators, EMAs (exponential moving averages), and Parabolic SAR that serves as a confirmation tool.
In conclusion, mastering the 80% percent winning forex strategy involves a holistic approach that goes beyond technical analysis and risk management. Traders must continuously learn, adapt, and optimize their strategy while also developing the psychological resilience needed to navigate the challenges of the market.
Why doesn't buy and hold work? ›
It implies zero transaction activity is optimal which is mathematically false. Buy and hold is a purely offensive investment strategy that ignores the defensive half of the investing equation - risk management. It implies risk is something to be accepted rather than controlled.
What is the alternative to buy and hold? ›
A better alternative to Buy and Hold is the rules-based, unemotional process of trend following. Trend following takes the approach of staying invested in uptrends when there is less risk present, and getting out of the market in a downtrend when there is more risk.
What is an example of a buy and hold strategy? ›
Buffett has pursued a buy-and-hold strategy regardless of short-term market fluctuations and changes in the value of Coca-Cola Company shares. For example, while these shares lost 54% in price from July 1998 to February 2003 inclusive, the investor continued to hold them in his portfolio.
What is the difference between buy-and-hold and stop-loss strategy? ›
The buy-and-hold strategy requires fundamental analysis in long-term periods, while the stop-loss method requires the detection of stock return patterns and is more usable in the short term.
What is a buy and maintain strategy? ›
Buy and maintain credit investing is focused on efficiently capturing the credit risk premium available in fixed income markets whilst preserving portfolio value over time.
How do you know when to buy sell or hold? ›
Investors must consider several factors before buying or selling an investment, including how much risk they're willing to take and when they'll need the money. In other words, investors should have a financial plan that outlines their investment and financial goals for the short and long term.
