Is Forex Buy-and-Hold Trading the Investing Strategy You've Been Missing?

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Skeptics of buy-and-hold trading in forex argue that it is a fool’s errand because currencies lack the main advantage of stocks. A company’s value may soar because a company has entered a new market or had a breakthrough in one of its products. Meanwhile, currencies rarely rally against each other unless, for example, a developing country’s currency is devalued because of political or financial turbulence.

However, others think that buy-and-hold strategies can be viable for experienced forex traders. Below, we take you through their rationale.

Forex Market

In the forex market, a trader can hold a position for anywhere from a few minutes to a few years. Depending on the goal, a trader can take a position based on the fundamental economic trends in one country versus another. For example, a long-term trade in the forex market, or a buy-and-hold position, would be advantageous for someone who had sold dollars to repurchase euros in the early 2000s and then held on to that position for a few years. 

Suppose an American buys shares in a company in Europe. They will have to pay for those shares in euros. Thus, there is a requirement to convert dollars to euros. The American trader is speculating on the growth of the European company and also on the appreciation of the euro against the dollar. In this example, the American may benefit from an appreciating value of the shares bought but also from an appreciating currency. 

Of course, conversely, had a European trader bought shares in a company such as General Motors (GM), they would have had to pay for those shares in dollars but would have lost value in both the shares and the currency during the same period.

Carry Trade as a Buy-and-Hold Strategy

Investors engaging in carry trades can benefit from buying and holding a forex pair. The carry trade is a way to profit from the interest rate differential between two currencies. For example, an investor might borrow in a low-interest currency, such as the Japanese Yen, and invest in a higher-interest-rate currency, like the Australian Dollar.

Unlike the fast-paced nature of short-term forex trading, the carry trade aligns with a long-term investment approach while potentially providing a steady income stream over time — assuming the interest rate conditions remain favorable.

Advantages of Buy and Hold in Forex Trading

The benefits of buying and holding in forex trading include the following:

• Interest income: With this approach, there is the ability to earn interest income via carry trades.
• Long-term appreciation: In addition to earning interest differentials, buy-and-hold forex investors can benefit from long-term currency appreciation.
• Lower trading costs: Buy-and-hold trading involves significantly fewer transactions compared with short-term trading strategies. This lowering of the number of trades translates into lower costs, including spread and commission fees.
• Alignment with fundamental analysis: Buy and hold strategies are closely linked with fundamental analysis. Investors using this approach leverage their understanding of broad economic factors to trade.
• Diversification and portfolio stability: Currency markets often move independently of traditional asset classes like equities and bonds, which means holding currency positions can act as a hedge against risks in other areas of a portfolio.
• Potential for compounding returns: By reinvesting the interest income earned from carry trades or rolling over positions into higher-yielding opportunities, investors can amplify their overall returns.

Disadvantages of Buy and Hold in Forex Trading

Here are some of the drawbacks:

• Exposure to currency risk: Currency values can fluctuate significantly because of economic factors, geopolitical events, and central bank decisions.
• Unpredictable market conditions: The forex market is inherently volatile and influenced by a wide range of factors, such as interest rate changes, political instability, and economic data releases.
• Interest rate risk: In particular with carry trades, the buy-and-hold strategy depends heavily on favorable interest rate differentials. These differentials can shift quickly when central banks alter monetary policies.
• Negative rollovers and carry costs: When an investor chooses a currency pair with unfavorable interest rate differentials, they would end up paying a negative rollover fee, effectively adding a recurring cost to holding the position.
• Opportunity costs: Holding onto a currency pair for an extended period means you can’t put that money elsewhere to invest instead.

Forex Buy and Hold Example

In this example, the trader enters a long position on USD/JPY at around 103.75, driven by diverging monetary policies between the U.S. Federal Reserve and the Bank of Japan. The idea is to capitalize on the interest rate differentials favoring the USD—let’s say the trader expects that the tightening by the Fed and ongoing loose policy by the Bank of Japan will lead to an appreciation in the value of the USD.

The trader sets a long-term target of 160 while managing risk with a stop-loss at 100, which serves as a safety net in case market conditions deteriorate unexpectedly. In this case the trader would have gained substantially with the forex trade meeting the target.

The Bottom Line

Buy-and-hold forex trading can be an effective strategy for those who want to benefit from interest rate differences between countries while avoiding the stress of frequent trading. Though this approach requires carefully considering currency risks and economic trends, it offers a more measured path to potential profits compared with short-term trading.