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 the buy and hold strategy in forex? ›
Buy and hold is a passive investment strategy where a trader buys stocks, currency pairs or other types of securities such as ETFs and holds them for a long period regardless of short term fluctuations in the market. The idea behind buy and hold strategy centered on long term tendencies.
Is buy and hold still a good strategy? ›
"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.
How to buy and hold foreign currency? ›
Ways to Invest in Foreign Currencies
- Standard Forex Trading Account. First, you can work with a foreign exchange brokerage to trade the currency you're holding (such as U.S. dollars) for another currency (Euros, Yen, etc.). ...
- Currency CDs and Savings Accounts. ...
- Foreign Bond Funds. ...
- Currency ETFs.
Three most profitable Forex trading strategies
- Scalping strategy “Bali” This strategy is quite popular, at least, you can find its description on many trading websites. ...
- Candlestick strategy “Fight the tiger” ...
- “Profit Parabolic” trading strategy based on a Moving Average.
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.
What is the risk of buy-and-hold strategy? ›
Market volatility is an inherent risk in any investment strategy, including buy and hold. During periods of market downturn, the value of investments can decrease significantly, causing concern for investors. It's essential for buy and hold investors to understand and accept the reality of these fluctuations.
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.
How do you make money from buy-and-hold? ›
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.
What is the buy-and-hold technique? ›
Passive investing, sometimes called buy-and-hold, is a popular investment approach where you invest in stocks and other securities with the intention of holding onto them for an extended period regardless of changes in the stock market.
Based on our previous top 10 list of the most stable currencies, we'd like to share our view on the best ones to invest in.
- European Euro. ...
- Swiss Franc. ...
- Japanese Yen. ...
- Swedish Krona. ...
- Norwegian Krone. ...
- British Pound Sterling. Currency code – GBP. ...
- Australian Dollar. Currency code – AUD. ...
- Singapore Dollar. Currency code – SGD.
Forex trading vs. gambling: Forex trading may appear similar to gambling, but there are key differences. While gambling relies on chance and randomness, forex traders can use strategies and tools to tilt the odds in their favour. Importance of self-control: Successful forex trading requires discipline and self-control.
Can you buy-and-hold a currency in forex? ›
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.
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? ›
Position Trading Strategy
Unlike day trading, position trading requires you to hold a position for weeks or even years. It is the best forex strategy ever, as traders don't have to deal with short-term price changes. This strategy is best for patient traders.
How to win forex consistently? ›
Traders alike must keep in mind that practice, knowledge, and discipline are key to getting and staying ahead in Forex trading.
- Define Goals and Trading Style.
- The Broker and Trading Platform.
- A Consistent Methodology.
- Determine Entry and Exit Points.
- Calculate Your Expectancy.
- Focus and Small Losses.
- Positive Feedback Loops.
Real World Example of Buy and Hold
An example of a buy-and-hold strategy that would have worked quite well is the purchase of Apple (AAPL) stock. If an investor had bought 100 shares at its closing price of $18 per share in January 2008 and held onto the stock until January 2019, the stock climbed to $157 per share.
Is buying and holding better than trading? ›
Investors generally seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter time frame, taking smaller, more frequent profits.
What is the difference between buy-and-hold and stop loss strategy? ›
Stop-Loss strategy is an exit strategy that cuts on losses and locks in profits while Buy-and-hold strategy is a strategy of measuring long-term performance. The Buy-and- hold strategy is mainly applied by value investors who have various systems when deciding when and if to invest in a stock.
What is the difference between buy-and-hold and market timing? ›
Buy-and-hold involves buying securities to hold for a long-term period, although the definition of long-term varies based on the investor. Market timing includes actively buying and selling to try and get into the market at the most advantageous times while avoiding the disastrous times.
