A quick search on Google reveals that both camps have armies of loyal followers with many on either side claiming only their method works. So what are we to believe? With active styles the managers use their timing skill rather than passively drip feeding in money.
In forex, most strategies we hear about are technical. With market timing the trader attempts to predict short-term ups and downs in price and trade them for profit.
Market timing as a trading approach has the following traits:. The day trader is the quintessential market timer.
Yet not all market timing strategies are short term. Trend following for example captures price movements over much longer periods. Trend following systems will track trending markets over weeks to months. A strict buy and hold advocate will say that market timing is futile because markets are efficient. Unless you have some insider information there is no point trying to pick short-term price fluctuations — because they are random.
But many market timers discount the EMH efficient market hypothesis on the grounds that the theory only looks at average returns across entire groups, and not those of individuals. And that users of financial markets do not always act rationally. Timing is important in almost every trading style. What sets the buy and hold group apart from timers is that for them there must be a fundamental reason for entering a position.
That means that the market either has to be undervalued or overvalued in their eyes. That said, value traders do need to time the market to some level. Think of Warren Buffett. Timing is still important with value investing because an asset is only undervalued or overvalued at a certain time. They have some strong evidence to back this up.
Studies of many stock indices show that the bulk of returns over entire years were often attributed to just a few days. We often think of buy-and-hold as being something that only applies to assets like stocks. But value trading is just as relevant in forex too, if not more so. With value trading we look to buy undervalued currencies and sell overvalued currencies. This sounds simple enough. So what pointers can we use to tell if a currency is overvalued or undervalued?
One way is to trade biases between the forward rate curve and spot rates. To do this we look for two currencies that have a wide interest rate differential. The strategy then tries to exploit anomalies in UIP uncovered interest rate parity.
This method has proven effective in carry trading over the years. Grid trading, scalping and carry trading. All ebooks contain worked examples with clear explanations. Learn to avoid the pitfalls that most new traders fall into. Economic models for currencies tend to look at things like economic growth rates, interest rate cycles , trade balances , inflation and purchasing power parity PPP. Plus in forex there are some other obstacles to the buy and hold trader.
Most retail broker accounts are designed for short term trading. Not long term holding of positions. Forex brokers love high turnover accounts — not ones that sit idle for most of the year. The value trader also needs the ability to trade in forwards, options and futures contracts. So often the only choice for the buy and hold trader is to move away from online brokers and to open a securities trading account with an investment bank.
Market timing and buy and hold seem poles apart. There are many convincing arguments for and against either approach. At the same time both do require making predictions about market direction and judgements as when to enter and exit the market.
You can certainly make money with either one of these approaches. But each requires different skills and a different mindset. Leave this field empty. When it comes to trading styles nothing divides opinion more than the choice between market timing and buy-to-hold. Market timers look for an edge by timing market swings whereas the other group passively buys and holds in the hope of gains to come. Buy and hold or market timing? Want to stay up to date?
Just add your email address below and get updates to your inbox. Leave this field empty if you're human: Marubozu Candlestick Patterns and What They Mean The marubozu certainly can be a useful trading signal owing to its simplicity and its easy interpretation The Bearish Breakaway A bearish breakaway is a chart formation that can appear in a rising market when the price starts to The Bullish Breakaway A bullish breakaway is a chart reversal pattern that can appear in either a bullish or bearish market But it can be useful when used alongside other Tweezer Top Chart Patterns A tweezer top in a chart is generally treated as a bearish reversal pattern.