Does Buy-and-Hold Strategy Work in Forex?
As the name suggests, the buy-and-hold strategy is a long-term type of investment where an individual buys a currency, commodity, or share and holds for a very long time.
Lots of forex professionals go against this strategy due to the fact that most currencies do not have the leading advantage stocks have. It’s necessary to know that a business or company may have its value skyrocket due to a breakthrough product or service, but currencies rally around each other.
There are lots of differences between currencies and stocks; because of the underlying disputes, many professionals believe the buy-and-hold strategy is not applicable in the forex market.
Furthermore, a trader who makes use of the buy-and-hold strategy is not interested in short-term price movements. This type of trader only uses this strategy as a form of passive investment, and he relies on fundamental analysis rather than technical charts and indicators.
There are different trading strategies in the forex market besides the buy-and-hold such as Day Trading, Hedging, Swing Trading, Carry Trade, Portfolio/Basket Trading, and Spear/Pair Trading.
Taking The Buy-and-Hold Position in The Forex Market
A forex trader can hold a position for years – depending on his goal and ambitions. He can take a long-term position based on some economic factors of a country against another. A buy-and-hold position is favorable to a trader who had purchased some Euros after selling some dollars in the early 2000s and held for some years.
Passive investors in the forex markets solely rely on fundamental analysis and do not take heed to technical indicators –as stated earlier. He would instead consider crucial factors such as inflation and unemployment rates of the country whose currency he has invested in.
The passive trader may also depend on the technical assessment of the business/company whose stock he owns, thus, even thinking about the business’ growth strategy, its services, and so on. If you want to buy and hold to a particular currency, you should also know the Carry Trade strategy.
Carry Trade Strategy
Carry trade strategy allows you to make more profit from a stable market. It is a form of strategy that involves a trader selling a currency that pays a low-interest rate such as the Chinese Yen and buying a currency – such as the Australian Dollars – that pays in a high-interest rate.
In the carry trade, a trader can also borrow currency in a low-interest country; convert it into currency in a high-interest rate country, and then invest it in high-grade debt security of that country.
At the same time, when you are considering the type of currency to trade with through Carry Trade strategy, you should also think of the projected changes in the interest rates of specific currencies.
The rule is easy: Purchase a currency with increment prospects on its interest rate and sell the currency without no increment prospect on its interest rate
You also need to consider the price swings between currencies too. You can invest in a currency with a high-interest rate; if there is a drop in its price and you decide to trade, you will notice that even though you have gotten enough gains due to its interest rate, you have also lost from trading due to the changes in the buy/sell price.
With that in mind, this strategy is only well-suited for sideways markets, where the price movement is likely to be static for a specified period.