The Carry Trade – What Exactly Is It?

You probably know that each different county sustains different monetary policies depending on their respective economies’ best interests, inflation perspectives, economic cycle, etc. I don’t want to get down into a full blown out course about macroeconomics here, so let’s just state that different countries carry different interest rates.

Well, Forex is nothing but the currency exchange market where people exchange some currencies for another at a set price (market price). Alright, so far so good. But like I just said one currency might yield a different interest rate than another one, so there is a differential that’s got to be paid (or charged) depending on which side of the coin you’re positioned. That interest rate differential translates to us Forex traders as what’s called “swap” in the Forex world lingo, and it’s cashed in (or deducted from) your account on daily basis by your broker.

The interest rates

The interest rates imposed by the world’s main central banks are, as of today, as follows:

USA: 5.25%
Europe: 4.00%
Canada:4.25%
England: 5.50%
Japan: 0.50%
Switzerland: 2.50%
Australia: 6.25%
New Zealand: 8.00%

As you can see, the Yen yields only a 0.50% of interest, whereas the Sterling Pound gives out a quite beefier 5.50%.

But wait a second Hector… I think I might be into something here… what if I asked for a loan in Japan (paying a 0.50% interest rates) and invested it in England (netting a 5.50%)… couldn’t I make some free money? If I went long on GBP and short on JPY simultaneously… wouldn’t I be paid a 5.00% interest rate differential for my money? and what’s more… what if I leveraged myself to 1:100, 1:200 or even 1:400?

And that, my friend, is the core principle of Carry Trading: exploiting the interest differentials between the different currencies in order to pocket the swap. For example, some brokers give 25 US dollars/day per each lot of LONG GBPJPY that you hold overnight (if you’re short, you pay the swap to your broker!). LONG USDJPY is about 11 dollars/day per lot depending on the broker.

The results of Carry Trading

Pull a zoomed-out daily chart of USDJPY, GBPJPY, EURJPY, AUDJPY, CADJPY or NZDJPY. Do you see those massive uptrends all across the board? (again, please remember that this article was writen in June 2007) yup, they all have been rocketing up like there’s no tomorrow. Carry Trading has been *the* trading theme throughout the last year – everyone, their mothers and their flatmates have been shorting the Yen against all the other major currencies seeking for that juicy yield.

How long will it last? who knows, but as long as EUR, GBP, USD, AUD and NZD keep raising their rates (which they’ve been continuously been adjusted to the upside by their respective Central Banks during the last two years already) and Japan stubbornly sustains its almost-zero-percent interest rates policy, I don’t see why the overall upward market sentiment should change any time soon, at least from a fundamental macro-scope point of view.

How to implement the Carry Trading principles into actual trading?

Well, there are many swap-exploiting techniques flying around. I mean, you cannot just go long GBPJPY, NZDJPY or USDJPY out of the blue because you may eat up enormous drawdowns if you miss-time your entry. At the end of the day, even though the overall long term trend is up, we could easily see a period of market re-adjustment and price could fall hundred pips to the downside. Have a look at what happened to GBPJPY in late february / early march 2007 – it plummeted almost 2000 pips within few days! That would most likely annihilate any trading account.

So, what then?

Well, like I say there are many techniques out there. For example, some people open two twin trading accounts: one swap-enabled (under which they long the GBPJPY) and one swap-disabled (under which they short the GBPJPY). Basically they eliminate the currency pair fluctuation by taking opposite trades in different accounts and they slowly-but-steadily bank the swap on one of them.

Other technique is the so-called Carry Hedge Baskets , which basically advocates to open multiple trades on different currency pairs trying to annul each other’s volatility, and thus benefiting exclusively from the swap. For example: Go long GBPJPY (you are paid a very high daily swap) and go short CHFJPY (you pay a very small daily swap). By doing so, in one hand you short the Yen (long GBPJPY) and in the other hand you long it (short CHFJPY), effectively limiting the JPY-fluctuation’s impact on your basket. Then you just need to adjust the lot size according to different money-management factors such as pip-value, the average daily volatility for each pair, etc and voila! you have your own Carry Hedge Basket. These type of baskets are all about money-management engineering, and how ingeniously you hedge the different currency pair in order to cancel each other out as much as possible – remember that the point of these baskets is to keep the volatility to a minimum while profiting from the constant money flow coming from the positive daily swap. I have seen some wicked baskets juggling 10+ currency crosses in and out as needed!

You Know About Stop Loss Hunting? No?

We have all heard about stop-loss hunting. It happens with stocks, forex and other trading instruments.

What does it look like?

Good, good… but what the hell does that actually mean?! Well, let me show you a chart for a clearer view:

In the EURUSD 1H chart above we have a clear downtrend. Moreover, there’s a rather obvious down-trendline that probably most traders have drawn on their respective charts. Alright, in this scenario, where are most traders to place their stoplosses? well, probably few pips above that trendline, isn’t it?

Big dogs (institutional traders, investment banks, hedge-fund managers and the sort) know this. They can “smell” where retail traders (us) have placed our stoploss orders, and they more obvious the trendline or the support/resistance level the better for them. Since those guys have the muscle to spike price under some specific conditions they mercilessly raid our stoplosses in order to shake us out of our positions.

How do they do it? well, they usually wait for volume dryouts in the market so they can indeed move the market with their massive orders. News announcements are their favorite time due to the high volatility market conditions. This is exactly what happens:

1) They wait for price to reach that hot level (in the previous example, that’d be the trendline near-abouts).

2) Then when trading volume is thin in the market (right at the news announcement, or during an off-peak time of the day, etc), they slap their massive orders into the market just enough to drive price beyond that key level.

3) All those poor people’s stop losses get triggered!

4) And here is the beef of it all: a stop loss order is nothing but a pending order opposite to your current position. In the previous example, since we were in a downtrend, most of the people who were short EURUSD also had a pending buy stop order (meaning their stoploss order) few pips above that trendline. Are you with me so far? so effectively what we have is a bunch of buy stop orders triggering at once, which actually enhances and accelerates the breakout thrust even further!

5) At this time, we have many people (AKA stoploss orders) wanting to buy EURUSD. And if someone buys EURUSD, that means that there must be someone else SELLING -shorting- EURUSD to them… Guess who is shorting EURUSD off those stoplosses? BINGO! the Big Dogs are feeding their positions off those stoploss orders because they know that the breakout is in fact only a fake breakout (since they popped it out of the blue at the end of the day) and soon the downtrend will resume as expected. So what they are effectively doing is re-loading short in a downtrend by forcing those buy stop orders to trigger. Evil, isn’t it?

Please note how the stoploss run (both to the upside and to the downside) happened very quickly, within one or two bars and usually with long-wicked bars. The breakout-thrust happens very quickly because, like I said before, all those stoploss orders triggering in cascade accelerate the move. And once all those stoplosses have been dried-out, price falls back down just as quickly!

That is why it’s very dangerous to trade through news announcements if we are near a significant level of support/resistance – you never know, there might be some Big Dog out there ready to breach through that level of support/resistance hoping to raid some -YOUR- stop loss orders.

Why A Publication Can Help With Stock Picks

“Every gambler knows that the secret to survival is knowing what to throw away and knowing what to keep. Because every hand’s a winner and every hand’s a loser…” Boy, is any song more true this year. Two traders could have traded the exact same stocks all year and the results would have been vastly different depending on their timing. If there was ever a year which highlighted the need for understanding basic fundamental and technical analysis, this was it. Basic fundamental analysis compels you to only trade quality, no matter how good the charts look. Remember, the dot coms looked technically sound for much of the year, but many of their prices are now under $10. Just last year, these same stocks moved that much in an hour.

The fundamental problem for these companies is that they had no earnings. Earnings drive the stock price over the long run. Their eventual doom was sealed because their business model did not work. Yes, a lot of people made plenty of money on these stocks, but like the game of hot potato, the person who holds the potato at the end of the game loses. How could you avoid this situation? Only trade stocks that have solid earnings and are in sectors which will grow over the next several years.

When you buy these solid companies, you protect yourself because if you do pick a bad entry point and quickly go underwater, there is a decent chance that the quality will come back. The easiest place to check out a company’s earnings compared to other companies in its sector is the Investor’s Business Daily. This paper also ranks and charts industry sectors.

Why The Time Is Right For Gold Investing

Everyday you hear on the news and read in the press about the current economic crisis. Experts say quite frankly that this is only the tip of the iceberg and only the beginning. They even proclaim that soon we will have a bankruptcy epidemic on our hands.

Ferdinand Lips, a world-renowned, well established and respected authority in the gold market, writes that, ”We are at the beginning of a historical development. We are witnessing world history. We are experiencing financial history as no generation before has experienced. We are on the cusp of a historic shift from paper currency to material property such as gold. This shift will alter the financial world.”

Dr. Martin Weiss, editor-in-chief of the publication “Safe Money,” writes in his latest Special Report that, “it is absolutely imperative that investors protect their assets!” The worst destruction of private property that we have ever seen – the biggest banking crisis in 72 years – has already begun.

Secure your future with the safest currency in the world, backed by physical gold bars.

“Whoever has gold sets the rules.”

Gold is the only currency upon which no debt is bound and thus it guarantees independence. Gold’s long-term purchasing power is statistically proven. Gold is a liquid asset. Gold is a protection against inflation. Gold may be transported, unlike certain other goods. It is available in various sizes and weights and can be exchanged virtually anywhere in the world for cash, goods, or services.

Secure your future by investing in gold!

Realize what are the benefits of a Gold Investment Contract:

I. Gold is a secure asset. Conversely, there are no promises with paper. And, forget about bonds, especially today when companies are filing bankruptcies everyday and are unable to honor debt obligations. With a Gold Investment Contract, you will receive the insured physical bars immediately after the transfer of your monthly contribution. You will receive physical gold that you can hold in your hands. It has material value and can be replaced or exchanged.

II. Gold increases in value over time. In 1912, the cost of one ounce of gold was $20. Today, in 2009, that same ounce of gold is worth about $900! Meanwhile, the dollar is actually decreasing in value.

III. Gold is an inflation-protected investment. Gold is the anchor against inflation and financial crises. Gold protects you against currency reforms, as its value remains constant during such reforms.

IV. Gold is a very profitable investment. In April of 1999, gold was trading at $300 per ounce. In April of 2009, that same ounce of gold was worth $900!

V. Gold is an anonymous asset. Nobody knows how much gold is in your possession.

VI. Investment gold is free of sales tax. Gold in ingot or wafer form, with a purity of at least 995/1000 is exempt from sales tax on orders of $500 or more (in Florida).

VII. You can have your own gold deposit with your Gold Bar Investment. For example you might make small monthly contributions in order to build your own gold depot. Each month the number of your own gold bars will increase, thereby making you richer and more independent!

VIII. Investing in gold has been, and will continue to be, one of the best investments due to its natural scarcity. As such, its position in the coming years will continue to improve.

In recent months, many people have equated an investment with a promise on paper. But, billions of dollars have simply disappeared. Customers have based their faith in banks on the promise of payment. But, banks have lost their money, your money.

A State can go broke, too, particularly if it has considerable debt. It is just as fruitless to point the blame at a country as it is to condemn the banks. If the money isn’t there, the effect is the same. Unfortunately, you can not hide under the responsibility of the State.

Remember, even our money is a promise on paper.

You alone are responsible for your present and your future and for the consequences of your decisions.

Think about your future. Invest in gold. And, ensure that your retirement is protected as well.

Market Outlook for Oil, Gold and Base Metals

Crude oil futures fell slightly during the week, as traders weighed stronger U.S. economic data against the modest decline in oil inventories. Oil prices were buoyed slightly by orders for durable goods, which rose 4.2% in June, the Commerce Department said Thursday.

The increase came in higher than economists’ forecasts of a 1.7% rise in June. Traders also looked to data from the U.K. that showed that all sectors of the economy expanded in the second quarter for the first time in nearly three years. Oil prices are under pressure as traders took into account the seasonal decline in gasoline demand that typically begins by early August in the U.S., the world’s largest consumer of oil.

Although domestic oil inventories fell by 2.8 million barrels for the week ended July 19, according to data from EIA, prices failed to rally off the data after the agency reported even sharper declines in the prior weeks. Meanwhile traders continued to keep an eye on developments in the Middle East.

Base-metals:

Copper prices are traded on a negative note in the last week and declined around 0.7 percent on the back of slow economic growth in china and expectation decline in demand for the metal from the country. On the LME Inventories declined around 0.4 percent to 638325 tonnes and on the SHFE inventories fell 0.6 percent to 167429 tonnes respectively.

Booking for product mend to last at least three years rose 4.2 percent, three times the median forecast of economists surveyed by Bloomberg, government data showed today. The dollar drooped against a basket of 10 currencies, boosting the appeal of copper as an alternative assert. Earlier, the metal dropped as much as 0.9 percent amid concerns that demand will ebb in China, the top buyer.

Gold:

This week, the Gold price has seen tremendous change of increase about 1.2 percent on account to upheld global market. Further ease in concerns from fed regarding cut in its bount buying program supported on upside in prices. Additionally, weakness in the US dollar index (dx)acted as a positive factor. The metal benefits as the dollar fell against the euro after a German Ifo survey showing business morale improved there. Data also showed new U.S. claims for jobless benefits edged higher last week, but remained within a range that suggests the labour market’s recovery is on track.