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First of all,You don't have to be a daily trader to take advantage of the forex market -
every time you travel overseas and exchange your money into a foreign currency, you are
participating in the foreign exchange (forex) market. In fact, the forex market is the
quiet giant of finance, dwarfing all other capital markets in its world.
Unlike the stock market where investors have thousands of stocks to choose from, in the currency market, you only need to follow eight major economies and then determine which will provide the best undervalued or overvalued opportunities. These following eight countries make up the majority of trade in the currency market:
United States
Eurozone (the ones to watch are Germany, France, Italy and Spain)
Japan
United Kingdom
Switzerland
Canada
Australia
New Zealand
These economies have the largest and most sophisticated financial markets in
the world. By strictly focusing on these eight countries, we can take advantage
of earning interest income on the most credit-worthy and liquid instruments in
the financial markets.
Economic data is released from these countries on an almost daily basis,
allowing investors to stay on top of the game when it comes to assessing
the health of each country and its economy.
Yield and Return
When it comes to trading currencies, the key to remember is that yield drives return.
When you trade in the foreign exchange spot market, you are actually buying
and selling two underlying currencies. All currencies are quoted in pairs,
because each currency is valued in relation to another. For example,
if the EUR/USD pair is quoted as 1.3500 that means it takes $1.35 to purchase one euro.
Leveraging Returns
The forex market also offers tremendous leverage - often as high as 100:1 -
which means that you can control $10,000 worth of assets with as little as
$100 of capital. However, leverage can be a double-edged sword; it can create
massive profits when you are correct, but may also generate huge losses when you are wrong.
Clearly, leverage should be used judiciously, but even with relatively conservative
10:1 leverage, the 7.5% yield on NZD/JPY pair would translate into a 75% return on
an annual basis. So, if you were to hold a 100,000 unit position in NZD/JPY
using $5,000 worth of equity, you would earn $9.40 in interest every day. That's
$94 dollars in interest after only 10 days, $940 worth of interest after three months,
or $3,760 annually. Not too shabby given the fact that the same amount of money would
only earn you $250 in a bank savings account (with a rate of 5% interest) after a whole year.
Carry Trades
Currency values never remain stationary and it is this dynamic that gave birth
to one of the most popular trading strategies of all time, the carry trade.
Carry traders hope to earn not only the interest rate differential between
the two currencies, but also look for their positions to appreciate in value.
There have been plenty of opportunities for big profits in the past. Let's take
a look at some historical examples.
Interest RatesKnowing where interest rates are headed is important in forex trading and
requires a good understanding of the underlying economics of the country in
question. Generally speaking, countries that are performing very well, with
strong growth rates and increasing inflation will probably raise interest rates
to tame inflation and control growth. On the flip side, countries that are facing
difficult economic conditions ranging from a broad slowdown in demand to a full
recession will consider the possibility of reducing interest rates.
Courtesy to the available literatures from the internet
requires a good understanding of the underlying economics of the country in
question. Generally speaking, countries that are performing very well, with
strong growth rates and increasing inflation will probably raise interest rates
to tame inflation and control growth. On the flip side, countries that are facing
difficult economic conditions ranging from a broad slowdown in demand to a full
recession will consider the possibility of reducing interest rates.
Courtesy to the available literatures from the internet
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