Page 87 - Ultimate Guide to Currency Trading

isolated skirmishes. Whatever the event, in today's connected world, the development will be
reported by the news agencies.

Like it or not, people react to developing news stories. A common saying is that "the news
rules!" A typical scenario is that you have spent the time studying the Reserve Bank of Australia's
(RBA's) website and you have read your broker's reports for the AUD/USD pair. Additionally, you have
been watching the stock markets around the world, and have monitored the VIX index.

OBSERVATIONS BEFORE MAKING A LONG AUD/USD TRADE

 The Reserve Bank of Australia hasn't raised rates in two terms.
 The Reserve Bank of Australia is scheduling a meeting in two weeks.
 Your broker's reports suggest the RBA will raise rates by 0.25 percent at the next meeting.
 Another commodity currency, NZD, had its rates raised by its central bank last meeting.
 The world's stock markets have been steadily rising (suggesting increased risk appetite).
 The Swedish krona has been moving steadily higher against the EUR (suggesting increased risk
appetite).
 The VIX has been lower recently (suggesting a calm, reassured market with increased risk
appetite).

After looking over your notes and sensing an increased risk appetite coupled with the chance
of an increase in the interest rates set by the Reserve Bank of Australia, you decide to place a long
AUD/USD trade that will make money when the AUD goes up against the USD. You know this trade
will make money if the stock markets continue to rise, the market continues to feel good about risky
assets, and the RBA raises rates.

A Good Trade, but Bad News

You might have a longer term, smaller trade on your books. It might be only 7 percent of your total
portfolio; it might be that you entered into the trade with the thought of using the trade as a sort of
carry trade for the next few weeks until the Reserve Bank of Australia meets and raises rates (when
you will capture a capital gain). Your carry trade is one that is set at a 50:1 mar-gin. You have the
intent to hold for two weeks and then sell. Since you are long a currency that pays a higher rate of
interest than the currency that you are short, you will accrue an interest on the AUD/USD trade. The
amount of interest is deposited into your account every night. It can accumulate rap-idly, as it
continuously compounds, and is measured in seconds and minutes in the trade (unlike regular time
accounts which compound monthly or quarterly). The AUD/USD trade is a risk trade. The more the
market likes risk, the better it will do. It is a well-thought out trade.