Buy and Hold Strategy in the Forex Market

The “buy and hold” strategy is quite popular in the stock markets but is often seen as useless and even dangerous in the Forex market. Many books simply state that this strategy cannot be applied to forex trading.
While there are certain limitations in using the buy and hold strategy in Forex compared to the stock market, it is a viable technique which can appeal to many traders and investors specializing in the forex market.
As its name suggests, it consists of two stages. The first is a process of selecting and buying one currency against another. The second stage of this technique is based on keeping the position open for a period that can last even several years so that the price of the currency bought rises against the currency sold.
Despite the fact that the name of this strategy only uses the word “buy”, in reality the trader is not limited to buying positions only. Sell trades work just as well in the Forex market.
The main features of this system are the following:

Possibility of obtaining high profits in the long term.
It is a trading style that allows you to “open and forget” new trades.
Positions with a positive interest rate spread offer additional income as this spread is added daily to the trader's account for each additional day the position is held open in the market.
On the contrary, positions with a negative interest rate differential accumulate costs for this item that in the long term can be significant.
The strategy does not have clear entry and exit criteria.
It requires a lot of patience, especially if the swaps are negative.
The broker must be reliable and stable enough to keep a position open for years.

Setting up and using the strategy

The selection of a suitable currency pair plays a fundamental role in these strategies. Ideally, the selected pair should pay a positive swap (due to a positive spread in their currency interest rates) in the direction of the trade. But that part can be ignored if the negative swap is insignificant relative to expected long-term earnings.
Fundamental factors should be a high priority in this strategy. Long-term considerations such as central bank policies, global economic development, and trends in unemployment rates can help inform a decision.
A “buy and hold” position must be opened with the minimum leverage or with enough free margin in the trading account to prevent countermoves in the market from causing a margin call, forced closure of the position or even catastrophic losses.
The exact moment of opening the position, although it can be used to obtain some additional advantage, is not as important as in conventional Forex trading which is mainly speculative. Waiting too long for a pull-back to occur that offers a better entry point can cause us to miss the opportunity to open a long-term position and should only be considered in special cases.
An extensive waiting period should be employed in this strategy. It is not uncommon for “buy and hold” positions in the Forex market to last for years and even decades.
The output of this type of operation is even more complicated than the input. Ideally, a long-term foreign exchange investor exits his position only when there is a need for capital or market conditions have changed dramatically. Alternatively, these trades may be closed when high profit levels have been reached or the level of loss has become intolerable.

Examples of trading signals generated by this system

USD/CHF long-term chart
The image above shows a long-term chart (monthly time frame) of the USD/CHF which covers the period from 1999 to the end of 2012. In this case the price of this currency pair has been moving in a steady downtrend for all that period of time.
The price has fallen from a maximum value of around 1.8300 (mid-August 2012) to a minimum value of 0.7064 in the month of April 2011. As the graph shows, the fall in the price has undergone upward corrections that in no time have they broken the downtrend line, so a short "buy and hold" position that would have been opened between 2000 and 2001.
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