Those who are skeptical of buy-and-hold trading in Forex argue that it is a fool’s errand because money does not have the advantages of a commodity. A company’s value may increase due to entering a new market or gaining interest in one of its products. At the same time, currencies rarely correlate with each other, except when the currencies of developing countries lose value due to political or economic crises.
However, others believe that a buy and hold strategy is possible for experienced forex traders. Below we will guide you to understand why.
Main Insights
- While the results are not as controversial as the products, there are good reasons for experienced traders to adopt and maintain strategies in Forex trading.
- Traders who understand the long-term economics of one country versus another can buy a currency and hold it for months or years to profit from the trade.
- Buy-and-hold Forex trading can also be done with other investments, such as American traders purchasing shares of European companies.
- Arbitrage trading occurs when an investor sells a currency offering a low interest rate and buys a currency offering a high interest rate.
- Investors consider central bank policies, global sentiment and unemployment when implementing long-term trading strategies.
Top-Traded Forex Pairs
Global Forex Market
In the forex market, traders can hold positions from a few minutes to a few years. Depending on the purpose, traders may work according to the business model of one country that influences others. For example, long-term buying and selling or buy-sell positions in foreign markets could have been profitable for a seller who bought back the euro in the early 2000s and then held that position for several years.
For example, an American buys shares in a European company. They will have to pay for the shares in euros. Therefore, the money needs to be converted into euros. Investors in the US expect European companies to grow and the euro to appreciate in value. In this example, Americans will benefit from the interest on the products they buy, but they will also benefit from foreign exchange.
Of course, if European investors instead buy shares of a company like General Motors (GM), they will pay for the shares in US dollars, but at the same time the value of both the shares and their currency will fall.
Using Carry Trade as a Buy-and-Hold Strategy
Investors who engage in arbitrage trading can make a profit by buying and holding Forex currency pairs. Arbitrage trading is a way to profit from the interest rate difference between two currencies. For example, an investor may borrow in a low-yielding currency, such as the Japanese yen, and invest in a high-yielding currency, such as the Australian dollar.
Unlike the fast-paced situations of short-term Forex trading, arbitrage trading is similar to long-term investments but can provide regular income, i.e. interest, over time.
Benefits of Buy-and-Hold in Forex Trading
The benefits of buying and holding in forex trading include the following:
- Interest income: With this approach, there is the ability to earn interest income via carry trades.
- Long-term appreciation: In addition to earning interest differentials, buy-and-hold forex investors can benefit from long-term currency appreciation.
- Lower trading costs: Buy-and-hold trading involves significantly fewer transactions compared with short-term trading strategies. This lowering of the number of trades translates into lower costs, including spread and commission fees.
- Alignment with fundamental analysis: Buy and hold strategies are closely linked with fundamental analysis. Investors using this approach leverage their understanding of broad economic factors to trade.
- Diversification and portfolio stability: Currency markets often move independently of traditional asset classes like equities and bonds, which means holding currency positions can act as a hedge against risks in other areas of a portfolio.
- Potential for compounding returns: By reinvesting the interest income earned from carry trades or rolling over positions into higher-yielding opportunities, investors can amplify their overall returns.
Drawbacks of Buy-and-Hold in Forex Trading
Here are some of the drawbacks:
- Exposure to currency risk: Currency values can fluctuate significantly because of economic factors, geopolitical events, and central bank decisions.
- Unpredictable market conditions: The forex market is inherently volatile and influenced by a wide range of factors, such as interest rate changes, political instability, and economic data releases.
- Interest rate risk: In particular with carry trades, the buy-and-hold strategy depends heavily on favorable interest rate differentials. These differentials can shift quickly when central banks alter monetary policies.
- Negative rollovers and carry costs: When an investor chooses a currency pair with unfavorable interest rate differentials, they would end up paying a negative rollover fee, effectively adding a recurring cost to holding the position.
- Opportunity costs: Holding onto a currency pair for an extended period means you can’t put that money elsewhere to invest instead.
Example of Buy-and-Hold Strategy in Forex
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In this example, investors have established a long position in USD/JPY around 103.75 due to the monetary policy divergence between the Federal Reserve and the Bank of Japan. The idea here is to take advantage of the interest rate differential in favor of the US dollar, assuming investors expect the Fed to tighten and the Bank of Japan to tighten further to make the US dollar more attractive.
The trader controls the risk with a loss of 100 while setting a long-term target of 160, which acts as a safety net in case the market goes down. In this case, the investor will benefit from achieving his goals in Forex trading.
How to Handle Geopolitical Risks with a Buy-and-Hold Forex Strategy?
Diversification is important. In addition, investors should be aware of field conditions, use stop orders, and analyze correlation results, which can help predict and sense changes faster and more accurately. Many investors also allocate money to higher-value currencies such as the US dollar, Swiss franc, or Japanese yen for greater stability.
Which Investors Thrive with a Buy-and-Hold Forex Trading Strategy?
These strategies are best for investors who have a long-term perspective, a high risk tolerance, and want to earn a steady income through interest. They also appeal to those who prefer to focus on macroeconomics but don’t always act on short-term prices.
Strategies for Handling Adverse Market Movements in Long-Term Forex Positions
Traders can use stop orders to limit losses or hedge downside risks by holding positions in opposing markets. Reducing position size or averaging out smaller positions can also help, depending on the trader’s belief in the underlying market. Are there still options available? Using options as insurance on profits and placing trailing stop orders can provide more protection while still achieving good returns.
Final Thoughts
Trading Forex can be a great idea for those looking to take advantage of different interest rates across countries while also avoiding the stress of constant market volatility. This approach requires careful consideration of margins and market dynamics, but it offers a more cautious approach to profitability than short-term trading.
