Carry Trade
The carry trade is a popular trading strategy used in the FX market. It guarantees traders at least some return on their medium and longer term positions. In the Carry Trade, speculators buy high interest currencies and sell currencies with low interest rates. These positions ensure that each trading day rollover-interest will be posted to the trader's account. Thus the Carry Trade has the potential to significantly enhance a trader's return.
Setting Up The Carry Trade
To become a successful carry trader, understanding the role that interest rates play in the FX market is a crucial task. A country offering high interest rates will attract more capital as investors seek to capitalize higher returns. As interest rates rise, investment will follow, which can in turn increase the value of the currency.
Carry trader's main focus becomes the expectation on the direction of a country's interest rate, to ensure their high rate of return.
Generally, traders seek to buy countries with high interest rates, and seek to short currencies who offer low interest rates.The carry trade works best under certain market conditions, and the selection of the currency pair can make the difference between a losing and a profitable trade.
When selecting the currency pair, traders want to observe two things. On the one hand, the trader wants to make sure he is buying the currency that has the higher interest rate and is selling the currency that has a lower interest rate in comparison. On the other hand, the trader also wants to view the health of the economy for the currency pair to ensure the market will move to his/her favor.
Essentially, the trader will be buying a currency with a stronger economy and selling the currency with a weaker economy. Some currency pairs that are usually selected to apply the carry trade strategy are: GBP/JPY, GBP/CHF, AUD/JPY, EUR/JPY, CAD/JPY, and USD/JPY.
Thursday, February 12, 2009
Monday, February 9, 2009
Seasonal commodities Tendencies
How can we take advantage of seasonal tendencies?
It is no secret that true commodities such as the grains and energies have distinct seasonal patterns. These seasonal tendencies are often the result of annual harvest cycles or product demand cycles. Accordingly, you may have heard the term "harvest lows" used in reference to markets such as soybeans or corn. Likewise, the media refers to the summer driving season as a catalyst for energy prices.
Beginning traders often assume that making money is as easy as buying unleaded futures at the end of May. Yet it is important to realize that the markets (in the long run) are efficient.
For example, the seasonal price fluctuation relating to the increased traffic on the road during the summer months actually occurs in the spring, and timing the move isn't as obvious as we would think. Similarly, heating oil futures rally well before the winter weather ever becomes a reality. Hence, don't presume that buying a heating oil call in September is a sure thing. Too many beginning traders allow themselves to buy into media hype without fully understanding the big picture of seasonality, the markets and, most important, the challenges of profiting from them.
Similar to the way that fear and greed dictate futures market speculators, these emotions play a large part in the cash value of a commodity. The price of grown commodities undergoes cycles of peaks and valleys based on recurring events. This cycle is often referred to in terms of "risk premium." Simply, risk premium is the product of fear of shortage on the consumer end and monetary motivation for producers to withhold supply from the marketplace. Field crops, energies, and the softs often succumb to phases in which risk premium is built into market pricing, then subsequently removed.
For example, in the case of grown commodities, until the seeds are in the ground there is no telling how much of the available farmland will be dedicated to corn, soybeans, cotton, and so forth, leaving the next crop yield (supply) uncertain. Farmers will opt to grow crops that they consider to be more profitable. As a result, consumers begin to bid prices higher out of fear of a shortage. Consumers also know it isn't necessarily important what farmers claim that they will plant but rather what they actually put in the ground that counts, and the market knows that. Therefore, the risk premium typically remains until the seeds are actually in the ground. If you are interested in researching this topic, I recommend Commodity Trader's Almanac, written by Scott Barrie.
The market's tendency to build and remove risk premium is the basis of grain market seasonality. However, expecting seasonality to be your holy grail may result in financial peril. Using seasonal tendencies as a guide rather than a rule may be best.
It is no secret that true commodities such as the grains and energies have distinct seasonal patterns. These seasonal tendencies are often the result of annual harvest cycles or product demand cycles. Accordingly, you may have heard the term "harvest lows" used in reference to markets such as soybeans or corn. Likewise, the media refers to the summer driving season as a catalyst for energy prices.
Beginning traders often assume that making money is as easy as buying unleaded futures at the end of May. Yet it is important to realize that the markets (in the long run) are efficient.
For example, the seasonal price fluctuation relating to the increased traffic on the road during the summer months actually occurs in the spring, and timing the move isn't as obvious as we would think. Similarly, heating oil futures rally well before the winter weather ever becomes a reality. Hence, don't presume that buying a heating oil call in September is a sure thing. Too many beginning traders allow themselves to buy into media hype without fully understanding the big picture of seasonality, the markets and, most important, the challenges of profiting from them.
Similar to the way that fear and greed dictate futures market speculators, these emotions play a large part in the cash value of a commodity. The price of grown commodities undergoes cycles of peaks and valleys based on recurring events. This cycle is often referred to in terms of "risk premium." Simply, risk premium is the product of fear of shortage on the consumer end and monetary motivation for producers to withhold supply from the marketplace. Field crops, energies, and the softs often succumb to phases in which risk premium is built into market pricing, then subsequently removed.
For example, in the case of grown commodities, until the seeds are in the ground there is no telling how much of the available farmland will be dedicated to corn, soybeans, cotton, and so forth, leaving the next crop yield (supply) uncertain. Farmers will opt to grow crops that they consider to be more profitable. As a result, consumers begin to bid prices higher out of fear of a shortage. Consumers also know it isn't necessarily important what farmers claim that they will plant but rather what they actually put in the ground that counts, and the market knows that. Therefore, the risk premium typically remains until the seeds are actually in the ground. If you are interested in researching this topic, I recommend Commodity Trader's Almanac, written by Scott Barrie.
The market's tendency to build and remove risk premium is the basis of grain market seasonality. However, expecting seasonality to be your holy grail may result in financial peril. Using seasonal tendencies as a guide rather than a rule may be best.
Technical analysis
Reach your full potential as a trader
by understanding your:psychological makeup.
Trading psychology plays an instrumental role in successful trading.
Traders who are successful realize they are not trading the markets but rather their own psychology.
But what does trading psychology really refer to?
How do you know if you have the proper psychological profile to be a trader?
What style of trading suits you best?
What specific type of trading vehicle would best fit your personality?
by understanding your:psychological makeup.
Trading psychology plays an instrumental role in successful trading.
Traders who are successful realize they are not trading the markets but rather their own psychology.
But what does trading psychology really refer to?
How do you know if you have the proper psychological profile to be a trader?
What style of trading suits you best?
What specific type of trading vehicle would best fit your personality?
Financial Futures
Commodities futures market
Even for the experts, the commodities futures market has always been a gamble. But now there are futures contracts for people who don't know beans about soybeans. The so-called commodities in this case are good old stocks and bonds, and they are trade in the fast and furious financial futures market.
The financial futures include contracts in treasury bills, bonds and notes, bank certificate of deposit and a variety of other interest -bearing securities. When you buy one of those contract,you are betting that, for example, interest rates will go down in the future and thus the prices of the bills, bonds or notes covered by the contract will go up.
You can buy financial futures trough commodity firms or through brokers who specialize in commodities at large stock brokerage houses. But if you are a would-be buccaneer in the financial futures market, take a tip from the experts and do your trading on paper for a while, until you get your sea legs. If and when you are ready to start wheeling and dealing for real, then pick active markets, such as those trading in Treasury bill and Treasury bond futures. The more trading that is going on, the more likely you are to find a buyer or a seller for your contract at a price you want. And to close out your position when the price reaches a certain level and they can help you limit any losses.
But anyway you play it, futures is a highly leveraged business. So this kind of investment--while increasingly popular-- is not for those who aren't prepare to take substantial risks.
Even for the experts, the commodities futures market has always been a gamble. But now there are futures contracts for people who don't know beans about soybeans. The so-called commodities in this case are good old stocks and bonds, and they are trade in the fast and furious financial futures market.
The financial futures include contracts in treasury bills, bonds and notes, bank certificate of deposit and a variety of other interest -bearing securities. When you buy one of those contract,you are betting that, for example, interest rates will go down in the future and thus the prices of the bills, bonds or notes covered by the contract will go up.
You can buy financial futures trough commodity firms or through brokers who specialize in commodities at large stock brokerage houses. But if you are a would-be buccaneer in the financial futures market, take a tip from the experts and do your trading on paper for a while, until you get your sea legs. If and when you are ready to start wheeling and dealing for real, then pick active markets, such as those trading in Treasury bill and Treasury bond futures. The more trading that is going on, the more likely you are to find a buyer or a seller for your contract at a price you want. And to close out your position when the price reaches a certain level and they can help you limit any losses.
But anyway you play it, futures is a highly leveraged business. So this kind of investment--while increasingly popular-- is not for those who aren't prepare to take substantial risks.
Commodities
Playing the Riskiest Game
The fastest, toughest, highest-risk financial game of all, there are commodities. As many as 90% of all amateur traders lose money and drop out within a year, and the only consistent winners are the brokers who charge your commissions. Still if you crave excitement and have a cast iron stomach, commodities trading can offer impressive gains for that tiny portion of your investable fund that you are willing to put completely at risk--your mad money. But unless you are an expert, never put more than a nickel or dime out of every investment dollar into commodities.
When you play the futures market, the contracts you deal in give the right to buy a specified commodity at a set price for limited time. Let's say the price of gold is $300 an ounce, and you think it will rise in the next six months. Then you can invest in a contract to buy 100 ounces of gold about $300 an ounce. That's $30,000 worth of gold. But speculating in gold futures cost less than 10% of the price of the metal. If gold goes up to, say $350 an ounce by the time you contract expires six months from now, you win. Your profit will be $50 an ounce, or $5,000---minus commissions.
But if prices move strongly against you, your broker will demand that you put up still more money. Unless you produce the cash immediately, the broker will sell out your position, at a potentially bone-chilling loss. To avoid that, give your broker a stop-loss order on each futures contract. That way, you can establish in advance a price at which you will automatically sell out a position rather than take further losses.
Small investors who speculate in commodities make two major mistakes. many of them operate on the basis of tips, thy are often wrong, and the amateurs cannot hope to match the professional traders for access to update, accurate information about markets. small investors also tend to be under capitalized. to stay in this game, you should have five dollars in reserve, ready to commit, for every dollar you put up.
You can make do with less money by buying mini-contracts. Mini contracts control smaller quantities of commodities than do regular futures, but thy are just as volatile as full-size contracts, and you will still get margin calls. But because you put up proportionately less money, you have less lose.
A reasonable way for small investors to get into the market is to buy one of the publicly traded commodity funds. The advantage is that the funds are professionally managed and diversify your investment among many types of commodities. More important, any losses are limited to the amount of money you put up; you are never subject to a margin call. but before you invest, be sure to check the fund's past performance.
The fastest, toughest, highest-risk financial game of all, there are commodities. As many as 90% of all amateur traders lose money and drop out within a year, and the only consistent winners are the brokers who charge your commissions. Still if you crave excitement and have a cast iron stomach, commodities trading can offer impressive gains for that tiny portion of your investable fund that you are willing to put completely at risk--your mad money. But unless you are an expert, never put more than a nickel or dime out of every investment dollar into commodities.
When you play the futures market, the contracts you deal in give the right to buy a specified commodity at a set price for limited time. Let's say the price of gold is $300 an ounce, and you think it will rise in the next six months. Then you can invest in a contract to buy 100 ounces of gold about $300 an ounce. That's $30,000 worth of gold. But speculating in gold futures cost less than 10% of the price of the metal. If gold goes up to, say $350 an ounce by the time you contract expires six months from now, you win. Your profit will be $50 an ounce, or $5,000---minus commissions.
But if prices move strongly against you, your broker will demand that you put up still more money. Unless you produce the cash immediately, the broker will sell out your position, at a potentially bone-chilling loss. To avoid that, give your broker a stop-loss order on each futures contract. That way, you can establish in advance a price at which you will automatically sell out a position rather than take further losses.
Small investors who speculate in commodities make two major mistakes. many of them operate on the basis of tips, thy are often wrong, and the amateurs cannot hope to match the professional traders for access to update, accurate information about markets. small investors also tend to be under capitalized. to stay in this game, you should have five dollars in reserve, ready to commit, for every dollar you put up.
You can make do with less money by buying mini-contracts. Mini contracts control smaller quantities of commodities than do regular futures, but thy are just as volatile as full-size contracts, and you will still get margin calls. But because you put up proportionately less money, you have less lose.
A reasonable way for small investors to get into the market is to buy one of the publicly traded commodity funds. The advantage is that the funds are professionally managed and diversify your investment among many types of commodities. More important, any losses are limited to the amount of money you put up; you are never subject to a margin call. but before you invest, be sure to check the fund's past performance.
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