If you’re someone looking to trade forex, you may know that there are many different strategies you can employ. The buy-and-hold (B&H) method has been seen in other trading markets but is not the obvious choice when it comes to forex. Here we will discuss a little more, giving you the building blocks to try the strategy to see if it can become fruitful for you.
In stock markets, buy-and-hold strategies are extremely popular, but they are often considered unnecessary or even dangerous in foreign exchange markets. Several articles and books claim that currency trading does not work with buy-and-hold strategies. Despite certain limitations, the buy-and-hold strategy is a viable strategy for foreign exchange traders or investors to use in comparison to equity markets.
As its name implies, buy-and-hold consists of two stages. To begin with, you need to select one currency and buy it with another. During the second stage of B&H, the purchased currency rate rises against the sold currency rate over a period of several years. B&H traders are not restricted to long side trading, despite the strategy’s name consisting only of the word “buy.” In addition to long side trading, short-term trading also works well.
Forex trading experts argue that currencies do not have the main advantage of stocks, which makes buy-and-hold a bad strategy. Currency values cannot rally against each other in the same way as a company’s value can. For example, if a company enters new markets, invents something successful, lacks competition, etc., its value can soar by hundreds of per cent. One exception is currencies in third-world countries depreciating rapidly due to political or economic instability. This strategy cannot address those, of course.
Even though this argument is entirely valid, it does not prevent currencies from being bought and held. Long-term forex trading is more flexible and controllable because currencies cannot depreciate similarly to shares, so fast growth can be compensated with extreme leverage (up to 1:2000).
In addition, as a forex broker, B&H can be an obstacle to employing the strategy. A reliable system must first and foremost survive long-term trades, execute exit trades, and transfer profits to the trader’s bank account. As a second requirement, the firm should be willing to hold open the trader’s position for that length of time. In addition, online FX brokers earn commissions and spread based on the number of trades they make. As a matter of fact, buy-and-hold brokers earn too little from this frequency to be profitable. It is only worthwhile for them to hold a long-term position if interest rates are adjusted to their advantage.
Is it the same as carry trade?
There are a lot of parallels between buy-and-hold and carry trade techniques. Both entail long-term investment, benefit significantly from the difference in interest rates, and lack hard and fast entry and quitting criteria. At the same time, there are significant distinctions between these two trading strategies:
The use of a currency pair has a significant impact on the buy-and-hold strategy. The ideal currency pair should have positive swaps in the direction of the trade. However, if the negative swap is minor in comparison to the expected long-term profit, it may be omitted. Fundamental elements should take precedence here; long-term factors such as central bank policies, worldwide sentiments, and employment trends might serve as a lighthouse.
A buy-and-hold position should use minimal leverage, with enough free margin locked in the forex account to prevent a margin call or stop-out. Although trade timing can be used to gain some additional advantage, it’s not as important as in conventional FX trading. Delaying for a pull-back may cause you to miss the overall trading opportunity and should only be done under special circumstances.
It’s better to take a long time. It’s not unusual for forex B&H positions to endure for years or even decades. Exiting a buy-and-hold trade is far more difficult than establishing it. An investor should ideally only exit a long-term currency position when they need the capital, or the market conditions have changed dramatically. Alternatively, a B&H position can be closed if some large profit target is reached or the capital takes too big a hit.
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