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 am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  2. How do you make money trading money?

    How someone makes money in forex is a speculative risk: you are betting that the value of one currency will increase relative ... Read Answer >>
  3. How do you lose money in the Forex market?

    All trades made in the forex market are made in pairs. In other words, one currency is always quoted against another currency, ... Read Answer >>
  4. What is hedging as it relates to forex trading?

    When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted ... Read Answer >>
  5. How do I close a long position in forex?

    Learn the different ways that traders close out existing long positions in the forex market, depending on whether their brokers ... Read Answer >>
  6. How do I implement a Forex Signal System into a forex trading strategy?

    Learn how traders use different types of forex signal systems such as trend-based or range-based to create or supplement ... Read Answer >>
Related Articles
  1. Trading

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
  2. Trading

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  3. Trading

    10 Forex Misconceptions

    The currency markets are full of myths that can harm a trader's chances at success.
  4. Trading

    Are You a Trend Trader or a Swing Trader?

    Swing traders and trend traders execute market timing strategies that require different skill sets.
  5. Trading

    Forex: Money Management Matters

    Currency trading offers far more flexibility than other markets, but long-term success requires discipline in money management.
  6. Personal Finance

    A Day in the Life of a Day Trader

    Day trading has many advantages and, while we often hear about these perks, it's important to realize that day trading is hard work.
  7. Trading

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
RELATED TERMS
  1. Forex Trading Strategy

    A set of analyses that a forex day trader uses to determine whether ...
  2. Liquidation Level

    In forex trading, the specific value of a trader's account below ...
  3. Forex Spot Rate

    The current exchange rate at which a currency pair can be bought ...
  4. Currency Day Trading System

    A currency day trading system is a set of analyses that a forex ...
  5. Mine And Yours

    Terms used by floor traders to signify buying and selling. If ...
  6. Rollover Credit

    Interest paid to a forex trader who holds a position overnight. ...
Hot Definitions
  1. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  2. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  5. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
  6. Interest Rate Swap

    An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for ...
Trading Center