I have been visiting the site for about a week and I have finished the “School of Pipsology” and I am very grateful for all of you that dedicated your time and hard work to putting this information together.
As you have no doubts I a newbie and it looks like I have A LOT to learn!
I do have a quick question though on the Carry Trade, if you earn interest on pairs by borrowing a currency at a lower % rate and buying at a higher % rate and the difference gets deposited into your account at market close 4pm EST. What’s to stop someone from going in at 3:59PM EST and just closing the order out at 4:01 EST just to make the % spread?
I know it can’t be that easy, so what am I missing?
If it is that easy, what are the risks of doing that?
Thank you again for all of your input and efforts in this arena!!
Yes it is that easy. The problem is that the intrest does not cover the spread. If you wait for it to come up to 0 then you would make a profit on the intrest, however it could go down as well. That is your real risk.
I’m currently looking at long term trading by ‘riding the wave’ and ‘carry trades’ at the same time e.g. going long on an uptrend USD/JPY,
Will there be any other risk as the one you mentioned below?
Is it better to swing trade (get max in short run pips), or hold it for a long time, then exit on peak/trough (both pips and interest rate maximized)?
Do you know any broker that paid higher interest than OANDA or Man Financial Singapore?
I could be wrong but I believe the interest gets carried over at 5pm Eastern. I usually see my interest payments by 5:45 PM via a reduced average rate.
As you have probably seen within the past couple of days, there has been a large carry trade shakeout. I was long NZD/JPY making lots of money every day while being very overleveraged. I soon saw a decently sized negative unrealized P/L in my forex.com account. I would recommend waiting for an opportune time to enter the position and also place a stop loss so your account doesn’t get hurt badly. This was my mistake because of the large daily swings; don’t make the same one!
Wow thats painful, I’ll dodge that pair for now, but I’ll monitor it, the interest rate difference is attractive enough
Btw I’m guessing you have an interest paying broker? Mind if I ask what you use?
How about:
Try Long USD/JPY…(I’m on demo still)
I made an entry at 118.20 yesterday with 100,000 units
Leverage 2.5% of margin (using Oanda)
Stoploss at 115.97 (I plan to hold it for a few months)
Current Daily chart shows retracement is taking place (Oanda’s chart)
Put in a small amount first for testing ( I used an extra demo to test it)
Sure… I use forex.com. I have been very happy with there service, spreads, software, etc. However, I have never used any other broker such as many people on babypips.com use, so I’m kind of bias. As far as the trade goes, 118.20 seems like a beautiful entry being that 118 is a medium term or longer bottom. With a stop loss of more than 3 big-figures, I would want to get paid a little more for my risk. Because all the Yen crosses correlate with one another, I would consider something with more interest rate differential. I would look into the NZD or AUD (the high yielders). Your average rate will decrease much more everyday than that of the USD/JPY. Also, the daily ranges are much larger in the high yielders; when these products get bought, they get bought. The USD/JPY has a smaller daily range and is very indecisive many days as to where it would like to go. If you look at a long-term chart of the high yielders/JPY, you’ll see that there is minimal downside; that’s what made it so attractive to me and that’s why I got burned… because I was careless when the pair was overextended. My advice (non-credible) is to hold out for another week or maybe longer in attempt to see if there is any more carry trade shakeout in the cards. Lastly, being that carry trades are directly correlated with equity markets(credit crunch vs. credit repricing, risk aversion, U.S. home sales), is this the “eye before the storm” or is the worst over? It’s hard to say but keep watching the equity markets and the charts, I know you’ll do fine.
I tried their demo before, the interface is simple and easy to use, but they dont have the high yielders I’m looking for EUR/TRY and USD/ZAR. As soon as their demo expired I bumped into InterbankFX (my other demo) then finally OANDA which has the two pairs and quite an attractive interest rate payment which is much higher than the yen pairs, though the best day would be to see TRY/JPY which many brokers I encountered said they werent volatile enough. You got experience with these pairs? Would you mind sharing them with me?
Yeah agree with you, NZD/JPY chart had a steep climb, tried them on interbank fx demo last week with 0.01 lot, some profit, but it was a high risk manouver, enough to give me some creep while monitoring.
May I ask how long you usually hold open positions? (I’m planning for 4-12 months Carry Trade run and long term momentum ride)(I’m guessing you hold it for several weeks)
Do you know any free charting package that as monthly data for EUR/TRY and USD/ZAR pairs? (OANDA doesnt have this)
I’m really not sure. I was under the impression that payments were based upon the interest rate differentials. I could be entirely wrong, but I thought forex.com only made money from the spread and not taking a cut from the interest payments to clients. Again I could be entirely wrong and someone should tell me if different brokers pay out different amounts. I also don’t have any experience with the Rand nor the turkish currency because forex.com does not offer their products. As far as my carry trades, I commit a small percentage of the total account, try to enter the position near a support level and let it ride while taking small portions off of the table when I feel the need. Of course this was not the case for my NZD/JPY incident; I was overleveraged and too greedy. I definetly did not take enough off the table when I knew I should. Lastly, I do not know of any charting packages with those products; I only use eSignal with a GAIN Capital data feed.
PS. With today’s 300 point DOW drop from the high to close, I would be still weary of initiating a carry trade anytime in the near future. The prices look temptimg but I am still going to hold out a little longer.
PSS. There is also talk of when the high yielders do settle that they won’t make the extraordinary gains they have previously made. Just something to keep in the back of OUR minds.
bpope you have some interesting posts here. I am pretty much just concentrating on technical analysis right not however you made mention of a direct correlation between equity markets directly affecting the carry trade. You repeated it by mentioning the Dow. Excuse my ignorance but what does say the DOW current weakness have to do with forex pairs with yen crosses?
ps i was fantasizing that there was a NZD/JPY pair and only now i find out there is! What a killing you would make if that was trending up. No doubt hard to controll greed with two sources of income like that presenting themselves.
Let me first start off by saying that the yen carry trades are not just correlated with the Dow. I say the Dow because that’s what people think of when they hear equity markets. All of the equity markets (global and U.S.) are interrelated. There are actually many different markets that are very interrelated. For instance, when the price of gold goes up, the value of the USD is declining, generally speaking. The two have an inverse relationship. If you were to look at a chart that overlaps the carry trades and equity markets, you would see that the two follow a pattern that is similar to one another. There are many reasons for this but there is one macro reason for this correlation. When Japanese buyers want to purchase American equities (or other high yielding currency equities), they need to sell their Yen in the open market in order to purchase Dollars. A purchase of equities must be made in the local currency, and for the U.S., that’s the greenback. Like I said, there are multiple other reasons for this correlation, but this is the largest one. In summation, when the U.S. equity markets are booming like they were, that means a lot of cash flow (foreign and domestic) is piling into the equity markets. Cheap foreign currencies such as the Yen were sold in order to buy dollars and in the end, American equities. When cash flow starts exiting the equity markets, the long carry traders will cover there shorts and buyback the Yen forcing the crosses to decline. Now there are multiple reasons for the decline in the equity markets in the U.S. but the bi-product of that is risk aversion(the movement out of risky assets((high yielding currencies)) back into safer currencies((Yen & CHF)))
I kind of jumped around a lot because the first time I wrote it, it was well organized and it took a while to write but I lost it due to an internet connection failure. So I’m sorry if this doesn’t make total sense at first.
You have a lot of questions here, some are answered on the school. Let me handle these questions first. As far as risk that is about it, but it is a big one. As far as swing or long trade, that is up to you. Just remember that the longer you want to hold a trade the larger the s/l you have to have. If you want to hold onto a trade for 6months it might go 300 pips against you for 5 weeks.
Onto brokers. My second favorite subject. You guys all love oanda and forex.com I think they suck. Main reason you have to have $1000usd in thier account to have the really nice charting package. Also when you shut your computer down you lose all of your charts and forex really boiled my kettle. They are so confusing on how to use the software. After six months of demo trading I went live and lost a good size of my account because I cancled a trade and the trailing stop put me back in a trade that I new was bad. I called them up and they said it was my fault for not knowing how to use thier confusing system. In conclusion STAY AWAY from them.
The broker I like. Any one that uses mt4 software. It is nice because you get the total charting package on a demo account and you dont lose all of your settings when you shut down. The software takes a little to get used to but it is well worth it. I like fxdd.com or strategybuilderfx.com for a micro account. Give them a try and good luck
I’m not defending forex.com, but I’m just letting you know that I’m the only one I know of at babypips.com that uses it. I was wondering why no one was using it; I’m sure that’s got a lot to do with it. Is that a fair assessment?
The main problem is their t/s. Thier t/s will get you into a trade as well as out. So if you are in a trade with a t/s and close the trade before the t/s is hit you have to cancle the t/s or it will get you back in. Call them up and ask why their software is so confusing and they say " I don’t think it is confusing" But they don’t feel sorry for stealing your money. I had a friend that closed his account and it took almost 3 months to get his money, around $300 this was of course after he had lost $1000 twice. I hate them, stay away!
I know this is not the brokers page but how long does it take you to get your money out of the account? I used to trade stocks/options through TD Ameritrade and I could put money in or take it out instantly. However, with forex.com, I have to fill out a withdrawl form. That doesn’t seem normal to me; do other brokers of forex deal the same way?
I learned it in my Econ 400 class. Stuff like this can also come to you if you think logically about the different processes and transactions that take place in the financial markets.
I forgot to mention, there is some good info on wikipedia. I don’t know if this particular topic is on there because I haven’t looked, but it’s a great place for info.
Thank you for re writing this bpope! Allthough i doubt i will ever really concentrate on the fundamentals what you wrote does make sense and i should study this so at least i know the basics.
I know, I don’t use fundies either. I keep them in the back of my mind but they hardly ever come into play when I’m trading. I don’t invest; I trade as I’m sure you do.