Buy and Hold Strategy | Trading Strategies
Buy and Hold Strategy- Buy and Hold strategy is very popular in equity markets, but in the Forex is relegated as useless, and even dangerous. Many articles and books simply state that this strategy of buying and holding is not applicable. While yes there are indeed certain limitations on the FX market is concerned, it is a viable technique, which may horrify many Forex traders or investors.
The buy and hold strategy consists of two stages. The first is the process of choosing and buying one currency with another. The second stage of this strategy is to keep the currency for a specified so that rise in price with respect to which it sold period. Although there are only “buy” in the name of this strategy, traders who use it are not limited to this. The sale also works in the Forex market.
Is it possible in Forex?
The main opposition argument against experts buy and hold strategy is that currencies lack the main advantage of the shares. While the value of a company can reach hundreds of times its original value for a critical event (eg entry into a market, successful invention, lack of competitiveness, etc.) currencies are not triggered in this way, with the only exception being third world currencies rapidly devalue by some political or financial turmoil. Of course this is beyond the scope of the proposed strategy.
While this argument is completely valid, the ability to use strategies buy and hold currencies is not removed. Lack of rapid growth or is compensated with extremely high leverage (to 1: 2000), while the inability of currencies depreciate similar to some actions it makes Forex trading more flexible and manageable long term.
One of the possible obstacles to the implementation strategy of buy and hold is the Forex broker. First it should be reliable enough to survive the operation to a long term, be able to run the output of the operation and the initial transfer to the bank account operator investment. Second should be willing to hold an open position so long. The last factor is the amount of spreads and commissions charged by brokers online Forex and depend on the operating frequency. Needless to say that the strategy of buy and hold this frequency is too low for a broker to earn enough. The only possibility that benefits from a long – term position is that interest rates move in your favor. So choose a right broker for this strategy is as important as choosing the currency.
It looks like carry trade …
Many similarities can be found between the buy and hold strategy and the carry trade . Both involve periods of sustaining long – term benefit substantially from the positive interest rate rules and have no input and output defined. At the same time the differences between them can be important:
- In buy and hold strategy to use protective stop-loss (or sometimes trailing stop-loss) can become an advantage.
- Unlike the carry trade, a stable and growing economy is required.
- While a positive rate of interest on the rollover is an additional bonus for positions buy and hold strategy is not a necessary requirement.
- In fact the good positions this strategy need more confirmations of entry and exit. Carry positive alone is not enough.
Characteristics of Buy and Hold Strategy
- Potential long-term benefit.
- Operations overnight interest rate positive grant an additional framerate.
- Style trading “autopilot”.
- The overnight interest rates negative can become a serious problem.
- It does not have a standard input / output light.
- You need a lot of patience (especially if the swaps are negative).
- The selected broker must be reliable enough to keep for years.
How to Trade?
- The choice of a suitable pair plays a crucial role in the strategy of buy and hold. Ideally a couple should pay positive swaps in the direction of the operation. But that part can be discarded if the negative swaps are negligible compared to the long-term gain.
- The fundamental factors should be a high priority here. The long-term considerations, as policies of central banks, global sentiment, and trends in unemployment rates can serve as a guide.
- A buy position and conservation should be opened with a minimum leverage, or with sufficient freeboard to prevent a margin call or even a stop-out.
- The timing of the operation but can be used to gain some additional advantage is not as important as in the conventional Forex. A delay of a pull-back can cost the entire trading opportunity, and should be considered only in special cases.
- a period sufficiently long waiting must be used; is not unusual that these positions “buy and hold” last for years, even decades.
- The output is more convoluted than the input frequency. Ideally an investor in long-term currency out of position only when there is need for capital or market conditions change dramatically. Alternatively, these positions can be closed when a high level of profits or losses are reached intolerable.
Examples of Buy and Hold Strategy
USD / CNY
The first example shows USD / RMB ( USD / CNY , US dollar against the Chinese yuan or renminbi) currency pair. Which he maintained, and still maintains a bearish long – term trend due to the negative trade balance of US with China and the appreciation of slow yuan by the PBOC . A long – term investor can benefit not only from reduced torque nearly constant currencies, but also gains much by the positive difference between the rate of Chinese high interest and low rate used by the Federal Reserve .
EUR / CHF
The second example is EUR / CHF (Euro against the Swiss Franc). Obviously, a part of the letter until 1999 is synthetic, but, however, is entirely valid. This currency pair a bearish long term trend remains since the 1970s to operate a bearish configuration of this strategy , one should be able to withstand certain periods of rotation together with the prevalence of negative interest rate difference between CHF and EUR.