Buy and Hold ... and Hold ... and Hold ...

Buy and hold is the standard stock trading strategy that is used by most non traders when they invest in a stock. Buy and hold gets its name because the strategy consists of buying a stock and then holding the stock indefinitely. Buy and hold trades are always long trades (i.e. entered by buying, and exited by selling), and there is no equivalent short trade, because most non traders believe that over the long term the stock markets only go up.

In theory, there is nothing wrong with entering a long stock trade, and holding the trade long term (the equivalent of buy and hold), however, there are a couple of problems with the way that non traders make their buy and hold trades that almost guarantees that the trade will lose money:

Market Dynamics

Buy and hold trades are usually entered because an investor believes that the underlying company is a profitable (or potentially profitable) company. This is not a good reason for entering a trade because it has nothing to do with market dynamics. When the stock markets decide to move downwards, it doesn't matter how profitable a company is, their stock is going to drop because of the larger view of the overall markets. Buy and hold trades should be entered because of a signal in the market dynamics, not because of an economic view of the underlying company.

Exit Strategy

Buy and hold investors are usually very confident in entering their trades, but have no idea of when or at what price they will exit their trades. A non trader recently told me that they were going to "hold their stock until it was doing really well", but they did not have any idea of what "really well" meant. In other words, they did not know if they would exit their trade when their stock was 10 points up or 100 points up. This means that they will never exit their trade because their greed will always expect the stock to go up a little bit more. In reality, the stock will eventually reverse and start moving downwards, and at some point they will capitulate, and exit their trade at a loss.

Conclusion

If you are a long term stock trader, make sure that you have a complete trading strategy, including an entry based upon market dynamics, management of the active trade, and an exit based upon a known target or an exit signal. If you enter a long term stock trade without any of these three elements, your trade is most likely going to be a losing trade, and a professional trader with a complete strategy will have taken your money.