The buy-and-hold (B&H) strategy is one of the most popular trading methods in the stock markets but is usually considered useless in the Forex market. Many articles and books simply stated that this strategy could not be applied in the Forex market.
While certain limits limit the use of the buy-and-hold strategy in the forex market compared to the stock market, it remains a valuable method that traders and investors can apply in the foreign exchange market.
What is the buy-and-hold strategy?
Buy and hold, as the name suggests, consists of two phases. The first is the process of choosing and buying a currency pair. The second stage of (B&H) is to hold the purchased currency for a period of time that may reach many years in exchange for the old currency. Although there is only the word “buy” in the name of this strategy, B&H traders are not bound by only long positions. Selling deals can work just as well in the Forex market.
Is it possible to apply this strategy in Forex?
The main discussion among experts who oppose the use of a buy-and-hold strategy in the forex market is that currencies lack the essential advantage found in stocks, according to which the company’s value can multiply several times as a result of some financial event (for example: entering new markets, carrying out a successful merger). or lack of competition etc.), while currencies cannot recover against each other similarly.
The only exception to this rule is the currencies of third-world countries, whose value can rapidly decline due to political or financial turmoil. Of course, such currencies are outside the user’s interests in the strategy.
Indeed, this discussion cannot be underestimated in any way. However, it still needs to completely negate the possibility of using the buy-and-hold strategy in the Forex market. The absence of a rapid growth feature can be compensated by using very high leverage (may reach 1: 2000), while the inability of currencies to rapidly decline, similar to what happens to stocks, makes forex trading in the long term using this strategy more flexible and controllable.
Pros and Cons of the B&H strategy
One of the main drawbacks to employing a B&H strategy is a forex broker. Firstly, it must be reliable enough to keep the planned trading position open long-term. Also, it must be able to execute the exit transaction and transfer the initial investment along with the profits to the trader’s bank account. Secondly, he must be willing to keep the trader’s trading position open throughout this period.
This factor should be considered because online forex brokers profit mainly from the spread between currencies, which depends on the trade frequency. The frequency of transactions with the buy-and-hold strategy is minimal; therefore, the brokers will not gain anything of value in this case.
The only possibility that will allow them to benefit from open positions in the long term is to adjust the interest rate payments in their favour. Therefore, choosing the broker with whom we will open deals according to the (B&H) strategy is no less important than choosing the currencies themselves.
Similar to the carry trade strategy (trading to take advantage of interest rate differences)
Many similarities can be noted between the buy-and-hold strategy and the carry trade strategies, both of which maintain the deal for an extended period of time, profit mainly from interest rate differences, and do not set clear rules for entry and exit.
At the same time, the differences between both trade methods are apparent:
- At B&H, using protective (and sometimes flexible) stop-loss orders can be an advantage.
- Unlike the carry trade, buying and holding does not require stable global economic growth.
- Benefiting from positive interest rate cycles may be an added advantage to buy-and-hold positions, but it is not essential.
- Profitable (B&H) positions need more confirmations and conditions before entering them.
How to trade with a buy-and-hold strategy
The choice of the currency pair plays a crucial role in the buy-and-hold strategy. Typically, the currency pair should achieve a favourable interest rate differential in the direction of the transaction. But this part can be overlooked if negative interest rates are negligible compared to expected profits in the long run.
Fundamental analysis considerations take precedence over anything else. Long-term considerations such as central bank policies, the state of the global economy, and trends in unemployment rates are significant determinants of this strategy.
A buy-and-hold transaction must be entered at a minimum level of leverage or with sufficient available margin in the forex account to avoid margin calls or even liquidate the transaction.
Although it can be used for additional advantages, the timing of the transaction is less critical than it is in the case of traditional forex trading.
Postponing entering the deal and waiting for a decline may cost the loss of trading opportunities in its entirety, so it should only be considered in some exceptional cases. Waiting for an extended period of time should be taken advantage of. It is common for buy-and-hold positions to last for long years, perhaps decades.
