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.
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