The “B&H” strategy (buy and hold) is very popular in stock markets, but is often considered useless or even dangerous in the foreign exchange market. Many articles and books explicitly state that this strategy is not applied in currency trading. However, this is a viable technique with certain limitations, which can be useful for many currency traders or investors.
The “buy and hold” strategy, as the name suggests, consists of two steps. The first is the process of choosing and buying one currency for another. The second stage of “B&H” is the period of possession of the purchased currency over several years until it is appreciated against the sold currency. Although there is only a “Buy” in the name of the strategy, the Forex market is also a good place to sell.
The main argument of the opponents of this strategy on the Forex market is that currency rates are not subject to such strong changes as the value of shares of different companies. Although this argument is true, it does not remove the possibility of using buying and holding on the currency market. The lack of rapid growth is easily compensated for with extremely high leverage (up to 1:2000), while the inability to make strong changes makes long-term Forex more flexible and manageable.
One of the possible obstacles to using the B&H strategy is the Forex brokers. Firstly, it should be a reliable enough broker to ensure the planned long-term trading. Secondly, such a broker should be ready to hold a long-term position. Brokers earn on the frequency of trades and such a client is unprofitable for them. That’s why choosing a broker to open a B&H position is almost as important as choosing currencies. We can only say that bank brokers are the closest to these requirements.
- Long-term profit potential.
- Positive swap transactions bring additional profit.
- Trade style “Install and Forget”.
- Negative swaps can be a serious problem.
- A lot of patience is required (especially if swaps are negative).
- The broker must be reliable enough.
How to trade?
- Choosing a currency pair plays an important role in this strategy. Ideal for positive swaps in the direction of trading. But this part may be missed if negative swaps are insignificant compared to the expected long-term benefit.
- Fundamental factors should have high priority. Long-term considerations such as Central Bank policies, global sentiment and unemployment trends could serve as a beacon.
- A long-term position must be opened with minimal leverage or with sufficient margin to prevent a margin call or even a stop-out.
- A long waiting period is the basis of this strategy. It can last for years.
- Getting out of a long-term position is even harder than getting in. Ideally, a long-term currency investor will only get out of this situation if there is a need for capital or if the market conditions have changed significantly. Alternatively, a position can be closed when the goal of big profit is reached or losses exceed a certain level
Here you can see a graph of the movement of the U.S. dollar against the Chinese yuan (USD/CNY). This rate is constantly declining due to the negative U.S. trade balance with China and slow revaluation of the renminbi by the People’s Bank of China. A long-term investor would profit from an almost constant decline in the currency pair and would also earn on positive swaps
The second example is the euro against the Swiss franc. The currency pair has been trading in a very long-term downward trend since the 1970s. In order to trade on the “B&H” strategy, you would have to be able to withstand quite a few drawdown periods combined with the prevalence of negative interest rate difference between CHF and EUR.