Saturday, January 24, 2009

Currency Interest Rates

Now that I'm using the daily and weekly charts, with an entry planned off the 4 hour chart, I need to think about the interest rates of the various currencies.

Many brokers will credit or debit your account on overnight forex positions.
Interest is calculated using the difference between the two currency interest rates. For example if you trade Euro Dollar, the ECB (European Central Bank) and FED (Federal Reserve) are the banks you would need to look too for the current rates.. If the ECB's rate is 2.25% and FED's rate is 4.25% the difference is -2%. A long (buy) position on Euro Dollar will generate a 2% debit interest on your account, a short position will generate a credit interest of 2%.

To show you the impact of this, here are a few examples and a link to use this currency interest rate tool. This is also know as the carry trade.

You need to know what will have an impact on your trade, and what the impact will be in order to make an informed decision. Using the chart below yo can see that the interest is minimal for most small trades, but of coarse this depends on the pairs, the rates, and the length of time you are holding the trade open.
I'm using this tool to narrow down the pairs I will be trading, and noting in my trade plan the desired trade to be on the right side of the interest rate. This will help me make my decision to trade the pair without having to goto the tool every time. Part of the weekly ritual is to update that table, for the pairs I have chosen to trade.

1 week for $30,000

1 weeks for $100,000

4 weeks for $30,000

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