By Lucas Montero, Technical Analyst at Finanflix
Many times, we've heard about the virtues of "Buy and Hold" and how this strategy would result in great benefits. This can be a double-edged knife; therefore, I invite you to continue reading this report so that I can tell you about this strategy in detail.
This potential strategy is only applicable to bull markets. Applying the "Buy and Hold" in bear markets or notoriously bearish markets, will lead us to generate sidereal losses in our balances as price falls. We lose our money, but we keep the amount of shares or cryptocurrencies in our portfolio.
If we apply this strategy deliberately and do not analyze the background trend under the bias that "Eventually, everything goes up" or "I'm going long", we will only generate significant losses.
By buying and holding assets like “Nikkei 225” ($NI225) we would have been at a loss from the year 1990 to the date. Likewise, if we study gold GOLD from 2011 to 2020, we would have been at a loss, influenced by the concept of “buy and hold” and that everything goes up in the long run.
Now, in the field of cryptocurrencies, taking a look at the XRP asset XRP/USD, if we bought at $1,494 (Price listed on Binance) when it was listed on said Exchange, we would have been in losses from 2018 to 2021.
To be in losses, does not only mean the nominal loss of our money, but it also comes into play the opportunity cost of maintaining a bearish position and not allocating our money to another position that we sacrifice with the purpose of holding it, and its potential bullish return.
In addition to the opportunity cost, there is the famous inflationary effect. as it is widely known, countries have inflation and it is something that we have to take into account when taking a position; since it would be our money going down in nominal terms for the derecognition of an asset and the loss of the purchasing power of said currency.
That being said, in bull markets, it is a good strategy, and, managing the risk correctly, can be a great scheme to apply.
Risk management consists of taking care of our capital, reducing losses exponentially, and trying to maximize profits, through the use of probabilities and stop losses. Using a correct risk management system in bull markets and bear markets will allow us to protect our capital against adverse situations when opening a position in an asset.
We must not overlook the famous "Risk of ruin" that will help us to measure in each operation the possibilities that we have in our favor and those against us in case of opening a position in an asset. Then, knowing that this risk of ruin exists, we will have to maximize the possibilities in our favor to achieve a favorable operation. It will not be the same to open a short position on a resistance, which is when we have a greater chance that the trade will go in our favor than to open a short position on clear support, where we will have great chances that the trade will go against what we are speculating.
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