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.




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