Hi all,
I was looking at an old thread from Merlin that was talking about interest rates, and how some places (ie oanda) pay interest. As he pointed out this is on average is a bad thing, as if you are trading all currencies you get stung by the difference between their interest rates for buy and sell. Unless as he also pointed out you stick to just those trades with good (or at least positive) differentials. This limits you to 50% of possible trades, but as I was going to chose 4 currencies to trade this does not seem like such a big deal.
I just want to make sure that I have this right.
If I buy 1 lot (100,000) of say AUD/JPY where the interest rate differential is 5% (I don't know exactly) then each day this trade runs you get
100,000 * 1 * (0.05/360) = 13.88 AUD in interest. This is just over 1 pips, but you get this every day you are in the trade. It looks like the AUD/JPY moves about 40 pips per day, so if you are in for the medium term you add just over 1 pip per day to your position. (On the other hand if you sell AUD/JPY you lose just over 1 pip per day).
Of course you have to be able to risk 100,000 over some days .. but it really does not matter on the size of the trade. It works out as 1 pip per day on whatever amount bought. This seems to increase profitabiliy a lot if medium - long term trades are the go. Yes you limit yourselve to the trade you can make, but if the buy signals were good for the trade, then surely sticking to positive interest rate differentials pairs increases your odds significantly.
I am *very* new to the whole forex game (still got at least 10 weeks of paper trading to go before I will start for real), and I am just in the process of learning all that I can about it, so please forgive me if this is a stupid question.
Dave
I was looking at an old thread from Merlin that was talking about interest rates, and how some places (ie oanda) pay interest. As he pointed out this is on average is a bad thing, as if you are trading all currencies you get stung by the difference between their interest rates for buy and sell. Unless as he also pointed out you stick to just those trades with good (or at least positive) differentials. This limits you to 50% of possible trades, but as I was going to chose 4 currencies to trade this does not seem like such a big deal.
I just want to make sure that I have this right.
If I buy 1 lot (100,000) of say AUD/JPY where the interest rate differential is 5% (I don't know exactly) then each day this trade runs you get
100,000 * 1 * (0.05/360) = 13.88 AUD in interest. This is just over 1 pips, but you get this every day you are in the trade. It looks like the AUD/JPY moves about 40 pips per day, so if you are in for the medium term you add just over 1 pip per day to your position. (On the other hand if you sell AUD/JPY you lose just over 1 pip per day).
Of course you have to be able to risk 100,000 over some days .. but it really does not matter on the size of the trade. It works out as 1 pip per day on whatever amount bought. This seems to increase profitabiliy a lot if medium - long term trades are the go. Yes you limit yourselve to the trade you can make, but if the buy signals were good for the trade, then surely sticking to positive interest rate differentials pairs increases your odds significantly.
I am *very* new to the whole forex game (still got at least 10 weeks of paper trading to go before I will start for real), and I am just in the process of learning all that I can about it, so please forgive me if this is a stupid question.
Dave
