Page 112 - Ultimate Guide to Currency Trading

risking the principal in the account. CNBC is always interviewing the senior fund manager who
consistently earns 10 percent per year, year in year out, in good times and bad. These are the fund
managers that you should emulate. While 10 percent per year might seem paltry in an FX account,
making the payment on a Mercedes E350 for the next sixty months is definitely some-thing to use as a
benchmark goal for your trading profits.

FX Trading: Profit or Income

There are two basic goals in currency trading, profit and income. You can use both goals in your
trading system, and both will add to your overall end-of-the-year returns. Profit is the process of
buying at one price, and then selling at a later date (from several minutes to several months) when the
price of the currency pair has changed in price. These profits are called capital gains. Most likely you
can easily understand the concept of capital gains in FX trading: it is similar to the buy low, sell high
idea in most other trading.

When you are currency trading, the bulk of the money will be made from buying and selling at
different prices. Since you can trade ten to fifty times per trading session, it is easy to see that this can
be the bulk of your gains while you engage in FX trading.

The other type of gain is called income. When you engage in what are called carry trades, you
will be going short a low-yielding currency and going long a high-yielding currency. It works out that
you basically convert your USD cash balance to the low-yielding currency. You borrow the low-yielding
currency, and then take the proceeds and invest them in a higher-yielding currency. You will then be
paying interest on your low-yielding currency loan and earning interest on the investment.

Your income is the net difference between the two currencies. If you borrow USD at 0.05
percent and invest in the New Zealand dollar at 6 percent, you will earn 5.5 percent, which is the net
difference amount. At 50:1 this equates to 275 percent per year.

When currency traders consider carry trades, they look for the difference between the
high interest rate and the low interest rate. Another big factor that traders look at is the
quality and price stability of the high-yielding currency: All high-yielding currencies are
not created equal!

With this rate of return you can set up an income-generating certificate of deposit. While CDs
are 100 percent safe, some people use these and bond mutual funds as a source of income at times in
their lives when income is more important than growth. If you are looking for a source of income, are
more conservative in nature, and are not interested in trading in your currency brokerage account for
capital gains, then an income strategy can be for you.