Buy and hold forex trading Strategy

The strategy to buy and hold a security for a long time is very often used, especially when trading shares. Many articles on trading strategies or books are of the opinion that the buy and hold strategy does not work for currency trading. While there are certain limitations to using the buy and hold strategy in the Forex market compared to stock markets, this strategy can be a viable technique that can be used by many investors.

How the buy and hold strategy works

As the name suggests, the buy and hold strategy consists of 2 steps. The first step is to select and buy a currency pair. The second step is to hold the position for several months or even years and wait for the bought currency to rise and the sold currency to fall. Do not let the words rise or fall irritate you. Of course, this strategy is not limited to rising prices. Selling or short selling currencies works the same way with this strategy.

Advantages:

  • Long term profit potential
  • Trades with positive swaps bring additional profit
  • “Buy and leave it” is not very time-consuming

Cons:

  • Negative overnight interest rates can be a serious problem
  • No clear entry or exit points
  • Needs a lot of patience (especially with negative swaps)
  • The broker must be reliable for years

Can this strategy also work with Forex trading ?

The main argument of experts who consider the buy and hold strategy to be useless in Forex trading is that currencies lack the main argument of stocks. While the value of a company may increase by hundreds of percent due to fundamental events (the opening of new markets, new inventions, lack of competitors), for example, currencies cannot be compared in this or a similar way. The only exception is the devaluation of currencies due to political or financial turbulence.

Although this argument is absolutely correct, it does not deprive the buy and hold strategy in Forex trading of its raison d’être. The lack of rapid growth of currencies comparable to that of shares is compensated for in Forex trading, for example, by the high leverage (up to 1:1000). Since currencies usually show less violent price jumps compared to shares, this also makes long-term trading of currencies more flexible and easier to control.

However, one of the possible obstacles to using the buy and hold strategy in currency trading could be the Forex broker. On the one hand, the broker should logically exist in the market long enough to safely manage your investments over the planned holding period and to be able to pay out any profits that may have arisen afterwards. On the other hand, the broker should of course be able to keep their position open over the entire investment period. You can see which brokers are suitable for this strategy in our Forex broker comparison. It should not be forgotten that Forex brokers generally make money on spreads and a certain amount of trading activity of their clients. With the buy and hold strategy, the broker logically earns rather little, with the exception of holding fees (interest fees or swaps). Therefore, the selection of Forex brokers is almost as important as the selection of currency pairs traded.

Similarities with the carry trade strategy

There are some similarities between the buy and hold strategy and the carry trade strategy. In both strategies, the holding period of the positions is very long-term and entry or exit marks are not defined exactly.

However, both strategies also have the following differences:

  • In the buy and hold strategy, a stop or trailing stop can sometimes be advantageous
  • Unlike the carry trade strategy, the buy and hold strategy does not require a stable and growing global economy
  • In the buy and hold strategy, a positive interest rate is a welcome bonus, but not absolutely necessary
  • Good buy and hold positions require better entry points. Positive interest rates alone are not enough.

Application of the strategy

  • The selection of the currency pair to be traded naturally plays a very important role in the buy and hold strategy. ideally, the currency pair should generate positive swaps in the trading direction. however, if the negative swap is in proportion to the expected long-term profit, this point can be neglected.
  • Fundamental factors should be carefully considered.long-term factors such as central bank policy or unemployment trends should be taken into account.
  • A buy and hold position should be opened with either a small amount of leverage or with sufficient free margin on the trading account to avoid a margin call.
  • The timing of the trade should not be neglected, but is not as important as in normal forex trading: waiting for a reset, for example, can cost you a good entry opportunity and should therefore only be considered in exceptional cases.
  • a long holding period of the positions should be planned. with the buy and hold strategy holding periods of years or even decades are not unusual.
  • Finding a suitable time to close the position is even more difficult in the buy and hold strategy than finding a suitable entry point. ideally, you should only close the position if you need the capital or if market conditions have changed dramatically. alternatively, the positions can of course be closed if a previously desired profit or an unacceptable loss has been achieved.

Example:

This example shows the USD/CNY (US Dollar vs. Chinese Yuan) currency pair that has been in a wonderful long-term downtrend for long-term investors from 2006 to 2013. Not only a long-term investor could have benefited from this downward trend, but he would also have benefited from the positive swaps due to the high Chinese and low interest rate of the Federal Reserve Bank.

Warning:

The use of Forex strategies is at your own risk. Broker-Bewertungen.de makes these available to its visitors free of charge and is not responsible for any losses incurred through the use of the Forex strategies. Please test all strategies thoroughly on demo accounts before using them on a real money account.


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