Page 104 - Ultimate Guide to Currency Trading

two or three days, and it looks as though the Asian markets will be down by 0.75-1 percent, then it
would be safe to assume that the AUD/USD will fall further in percentage than the Swiss franc will gain
against the EUR. The SEK will also fall a great deal against the EUR, as the SEK very closely follows the
good fortunes of the European and U.S. stock markets. It is safe to say that if the U.S. stock market is
going down, then there is a really good chance that a short SEK will make you money.

With this in mind, it would be good to put 4 percent in a short AUD/USD, 4 percent in a long
EUR/SEK and only 2 percent in a short EUR/CHF. This will give you a good chance of gaining when the
USD goes up. You will also be 200 percent covered if the EUR gains. To figure out your hedge, think of
it this way: You will make two dollars for every EUR that goes up (long EUR/ SEK is 4 percent) and
possibly lose one dollar for every EUR that goes down (short EUR/CHF is 2 percent). If the world's
traders can't figure out what to do with the EUR/USD, then you will be effectively hedged on both
directions of the euro and the U.S. dollar. This is a good example of a partial hedge for the very
unpredictable EUR/USD currency pair.

Part of the fun of trading the currency markets is just getting your calculator out
and planning out trades and hedges for those trades. Planning an effective, active
hedge can be a challenge within itself. Three-sided trades can work especially well
Essential as an actively managed currency-trade hedging system.

The next thing would be to figure out ahead of the trade your take-profit points. You can think
of a 0.5 percent gain for each pair and then triple that for a stop loss of 1.5 percent. In this case you
will exit out of the trade with a profit three times as often, as you are forced to close out of the trade
due to a loss. Remember, winning is what counts in currency trading. The more wins you can score,
the stronger your account will be, the more confident you will become, and the more money you will
make!

Carry Trades

The last bucket of traceable money that you should allocate is the money that is set aside for carry
trades. A carry trade is a longer-term trade that is set to collect continuously compounding interest
over the weeks and months that you are in the trade. Carry trades are placed by selling a lower-
yielding currency and buying a higher-yielding currency; the JPY, USD, and CHF have historically been
used to fund long exposures into the fairly secure, high-yielding currencies such as the AUD and NZD.

This type of trade will make money as you pay the interest on the charge of borrowing low
and investing at a comparatively very high rate of return. The difference may be upward near 5-6
percent on a nonleveraged basis, and 250-300 percent at a 50:1 set leverage.

It is best to get into these trades after a correction in the stock market. It is at this time that
currencies such as the AUD will fall the most as com-pared to the USD because risky assets such as