Skeptics of the buy-and-hold approach in forex argue that it’s ineffective because currencies lack the dynamic growth drivers that stocks have. Stocks can surge in value due to events like new market entries or product innovations, while currencies tend to remain stable unless affected by political instability or financial crises in emerging economies.
Due to this fundamental difference between stocks and currencies, many believe that a buy-and-hold strategy doesn’t apply to forex trading. However, some experienced traders consider it a viable strategy.
In the forex market, traders are typically classified into three groups based on their preferred trading time frame: day traders, swing traders, and position traders. While position trading or buy-and-hold can be seen as a form of investment, it is actually a long-term trading strategy.
Key Points:
- Although currencies don’t generally rally in the same way stocks do, a buy-and-hold strategy can still be viable for experienced forex traders.
- Traders who understand the long-term economic trends between two countries may engage in a buy-and-hold strategy, holding onto a currency for months or years to profit from these trends.
- A buy-and-hold forex strategy can also work in combination with other investments, such as an American investor buying European stocks while speculating on the appreciation of the euro.
- The carry trade strategy involves borrowing a currency with a low-interest rate (like the yen) to buy a currency with a high-interest rate (like the Australian dollar), profiting from the interest rate differential.
Forex Market Trading:
In the forex market, traders can hold positions for a variety of time frames, from minutes to years. A long-term strategy, or buy-and-hold position, might have been advantageous for someone who exchanged dollars for euros in the early 2000s and held onto that position over several years.
For instance, an American investor buying European stocks would need to convert their dollars to euros. This means the investor is speculating on both the growth of the European company and the appreciation of the euro. Similarly, a European investor buying U.S. stocks could face losses in both the stock value and the currency.
Carry Trade:
The carry trade is a buy-and-hold strategy where traders borrow a low-interest currency (like the yen) to invest in a higher-interest currency (like the Australian dollar). The trader profits from the interest rate differential between the two currencies. However, while the trader can predict the interest earnings, the future value movements of the currencies are uncertain.
Many forex traders are short-term market timers, but some aim for long-term profit by considering central bank policies, global sentiments, and trends such as unemployment rates. Buy-and-hold forex positions can take years or even decades to play out.
