Is there a buy-and-hold strategy in forex, or is the only way to make money by trading?

By Peter Cherewyk AAA
A:

Typically there are different ways to trade in most markets. Traders have been classified into three groups, primarily based on the time frame they prefer to trade. For simplicity, we can label these three groups as day traders, swing traders and position traders. Some people consider a position's trade or buy-and-hold strategy as an investment, but in reality it is just a long term trade.

Nevertheless, in the forex market, one can hold a position for as long as a few minutes to a few or more years. Depending on the goals of the trader, one 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, if one prefers that term, would have been good for someone who had sold dollars to buy euros back in the early 2000's and then held on to that position for a few years. Suppose an American buys shares in a company in Europe, they will have pay for those shares in euros, thus there is a requirement to convert dollars into euros. Not only is the American speculating on the growth of the European company, but also on the appreciation of the euro against the dollar. In this example, the American may have benefited from an appreciating value of the shares that he or she bought, but also benefit from an appreciating currency. Of course, in the converse, had someone in Europe bought shares in a company like General Motors (NYSE: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 time period.

If one wants to buy and hold a currency, one would possibly 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 he knows how much interest he will receive, he does not know how the two currencies will continue to perform against each other.

Most of the Forex traders though, tend to be short term traders, constantly timing the market swings in the hope of profiting from doing so. (For more, see Forex Tutorial: The Forex Market.)

This question was answered by Peter Cherewyk.

RELATED FAQS

  1. What are the most common market indicators forex traders follow?

    Learn the most common technical indicators that forex traders and currency market analysts utilize to predict likely market ...
  2. What is the difference between pips, points, and ticks?

    Learn the differences between points, ticks and pips and how each are used by investors to measure price changes in stocks, ...
  3. What is the difference between extensive margin and intensive margin in economics?

    Find out why it is important for traders to understand the difference between initial margin requirements and maintenance ...
  4. How do I use STIX Oscillator to create a forex trading strategy?

    Find out how to use STIX oscillator in forex trading, and understand how to use the STIX and TRIX oscillators together to ...
RELATED TERMS
  1. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
  2. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  3. ICE LIBOR

    See LIBOR
  4. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  5. Cash-And-Carry Trade

    A trading strategy in which an investor buys a long position ...
  6. Holding Period Return/Yield

    The total return received from holding an asset or portfolio ...

You May Also Like

Related Articles
  1. Trading Strategies

    Top Day Trading Instruments

  2. Trading Strategies

    Know How To Manage Gaps On Your Trading ...

  3. Forex Strategies

    Understanding Peer-to-Peer Foreign Currency ...

  4. Investing

    What Is The Real Picture Of Linn Energy?

  5. Forex Strategies

    The Top 10 Forex Brokers for Beginners

Trading Center