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.
- 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.
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.
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.