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 can use the buy-and-hold strategy in forex to capitalize on long-term economic trends, reduce trading costs, and avoid short-term market noise. This approach allows for compound growth over time and aligns with fundamental analysis, minimizing the impact of daily volatility.
What is the buy-and-hold strategy in forex? ›
The buy and hold strategy is a long-term investment approach that involves purchasing securities and holding them for an extended period. It is based on the belief that, despite short-term market fluctuations, the value of the investments will grow over time.
Is buy-and-hold still a good strategy? ›
Yes, the Buy and Hold strategy is particularly well-suited for retirement planning. Its long-term nature aligns with the typical investment horizon of retirement planning, allowing for capital appreciation and the benefits of compounding returns over several decades.
Can I buy-and-hold 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.
Why is buy and hold not always a good strategy? ›
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.
Is buy and hold profitable? ›
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 1% rule? ›
According to this rule, after purchasing and rehabbing the property, the monthly rent should be at least 1% of the total purchase price, including the cost of repairs. This guideline helps ensure that the rental income covers the mortgage payment and operating expenses, leading to positive cash flow.
Why doesn't buy-and-hold work anymore? ›
Buy and hold makes no sense because it implies the risk of assets is always justified by the reward. The idea that every year is a good year to own stock is patently false.
How to beat buy-and-hold? ›
Switch positions if its price falls below (or rises above) the five-month average. This strategy provides a positive return over all long periods and over each decade in the sample and beats the “buy-and-hold” strategy, too.
Can I trade forex with $100 dollars? ›
A few dollars will be enough to start trading in a cent account, but you will need at least $100 to become a professional trader and earn a substantial income in the forex market. Trading Forex with $100 is a way to train yourself, but that deposit won't be enough to earn big money.
Forex trading may make you rich if you are a hedge fund with deep pockets or an unusually skilled currency trader. But for the average retail trader, what is often promoted as an easy road to riches, can quickly become a rocky highway to enormous losses and potential penury.
Is forex trading ending in 2026? ›
Considering its essential role, there is no anticipated date or likelihood that the forex market will end.
Is there a 100% winning strategy in forex? ›
The short answer will be no. There simply isn't a 100% winning strategy in forex. What works in a specific market at a specific moment may not be replicated or repeated to bring the same results. Trading forex is risky and complicated, and no strategy can guarantee consistent profits.
How to make 50 pips a day in forex? ›
Focus on the pending order and place a stop-loss. If it is a buy order, the stop-loss should be placed 5 to 10 pips below the 7 am candle's low. If it is a sell order, 5 to 10 pips above the 7 am candle's high. In both cases, your take-profit would be 50 pips above (buy order) or below (sell order) the order.
What is the 5-3-1 strategy in forex? ›
The principles of choosing five currency pairs, developing three trading strategies, and selecting one specific time of day offer a structured approach, reducing ambiguity and enhancing decision-making.
What is an example of a buy-and-hold strategy? ›
Buffett has pursued a buy-and-hold strategy regardless of short-term market fluctuations and changes in the value of Coca-Cola Company shares. For example, while these shares lost 54% in price from July 1998 to February 2003 inclusive, the investor continued to hold them in his portfolio.
What is the best buy-and-hold stock strategy? ›
Buy and Hold
To get the most out of this strategy, you'll want to purchase enduring stocks, such as shares in strong and resilient brands. Additionally, keep your buys relatively small. The gains are meant to come from stock growth in the long term rather than significant increases in the short term.
What is the risk of buy-and-hold strategy? ›
Investors can pick investments that will lose significantly over time. This is perhaps the largest risk attached to the buy and hold strategy. Not immune to fluctuations: Long term investment does not ensure that your assets will not face fluctuations.
Is market timing better than buy-and-hold strategy? ›
Research shows that long-term buy-and-hold tends to outperform, where market timing remains very difficult. Much of the market's greatest returns or declines are concentrated in a short time frame.
