Never even ventured into Forex, but I love the idea. So I would think an easy way to make money would be to pick a currency that is strong over long periods, pick one that is weak, buy the former against the latter. Say the USD versus Mexican Peso. Over any meaningful period over the last say 30 years I've only see the Peso depreciate versus the dollar. So, I would go long dollar and short the peso. But I understand its not that easy. Because if the interest rate in Mexico (or some interest rate, not sure which one - the central bank one?) is higher than the U.S., if you are long dollar/short Peso you will have to pay someone interest? I assume the counterparty? But why? And how does all that work? Thanks!
Asymmetric information is built into forex. Start with the basics. Who wants me (as a retail trader) to trade this market? Why do they want me to trade it? How much risk do I have to assume to try to make money (in a day, a week, a month)? Can I hedge off some of the risk and just take a slice of it? How can I get more information than the next guy? I didn't like the answers to these questions. Found better markets elsewhere...
1-Long US$ vs. short MXN will have negative swap fees so you'll pay interest. Broker will deduct from your account. 2-That's not a chart I'd want to be long now IMO. 3-There are multi-year periods in that chart where trend was down. Hope you're patient
Thanks all! Bum, that chart does look scary lol. But I was just using that particular currency pair as an example. So I'm really asking about your #1. The "negative swap fees" and thus interest I will pay - how does that work? How do I determine what those fees/interest would be? It seems to me that given that you have to pay interest/fees (or receive them on the other end) just computing the beginning and ending price of your currency trades would never calculate your true profit, you'd have to take the fees/interest into account. So how has the dollar done versus the peso over time, FACTORING IN THOSE FEES/THAT INTEREST? And why exactly those fees/interest is imposed is beyond me. If I went to a local currency exchange herein the U.S., and converted into pesos, I certainly wouldn't be getting any interest/fees on those pesos. Why would I get them if I go through a foreign exchange market? Thanks! And sorry for the totally newb questions!
The swap (interest) fees are calculated by the broker. MXN has higher interest rates now than the US$ so long USDMXN will cause swap fees. Each broker is a bit different with regards to the fees so need to check the website to see how they calculate the fees. The fees are continuous as long as you hold the position, just like receiving interest with your money in a bank. If you short USDMXN then you should receive swap payments but to a smaller degree than what you'll be charged for being long since the broker keeps some of the fees. As long as the fees aren't too high though, the price movement on the chart will be the largest % of your profit/loss. Interest payments add up over time but if there's any decent movement in the currency, the fees are minimal in relation to the price change P/L. When you go to a bank to do the transaction, you're not short US$ and long MXN so no swap fee. You're simply exchanging one currency for another. You've given up US$ but you're not short US$. In a brokerage account, you're always long one currency vs. short the other. Since you're trading on margin at a broker, you're borrowing one currency to lend out the other currency since your account doesn't have near the true amount that your trading. Taking cash to a bank, there's no margin involved.
Thank you Bum! So is this a true statement - the interest rate charges imposed on people that are long a currency with a lower interest rates vis-a-vis the one they are shorting, are not imposed by any central bank or any other bank, they are just a charge imposed by the broker? Same on the other end, the corresponding (but lower to take the house cut) rate that is paid to the person that is long the currency with the higher interest rate is simply paid by the broker essentially by broker choice? I suppose they incorporate these rates to try and entice people to take the bet the other way? Also, curious - if I exchange $100 for $1000 pesos at a currency exchange place, how am I not in essence short the dollar as to that $1000 pesos? If the peso rises 50% versus the dollar (or dollar sinks 50% versus the peso), so that a it is noe 5 pesos for a dollar, and I exchange my $1000 pesos for $200, was I not long pesos/short dollar? Thanks so much!!!
Brokers are just passing along the interest costs/proceeds to the customer minus a cut for themselves. They're not trying to "entice" any particular trade. Brokers are interested in trading. As I mentioned earlier, the interest amount is so minor relative to the profit/loss of the price movement it's not a big "motivator" for trading. Interest rates are more for large institutions that hold large sums of money. They want to park large sums where they get the best return. That's why big trends are with central banks raising/lowering rates. Most short-term traders don't pay much attention to swap fees. You can't exchange $100 USD for $1000 worth of Pesos at a bank. If you take $100 USD to a bank, you'll get $100 worth of Pesos based upon the exchange rate. A bank isn't giving you credit to short $900 USD and walk out of the bank with $1000 USD worth of Pesos. If the exchange rate is dramatically different later when you go back in the bank to exchange the Pesos back to USD, then you'll receive the difference but you can't look at it as being short USD. This would be a foolish way to trade currencies. The spread is considerably wider at a bank than at a forex broker. You also have NO leverage if you exchange at a bank. $1 = $1 at a bank but $1 = $50-500 at a broker. When someone exchanges currency at a bank, they usually need the opposite currency for a purchase so they have no intention of returning to the bank later to exchange it back to the original currency. If you want to speculate on a currency, open an account at a broker. Leave the bank exchanges for "real world" activities. ***Even if you exchange $100 USD for $100 worth of Pesos, you're not short $100 worth of USD. You just have Pesos instead of USD. Otherwise, why wouldn't you say you're short Aussie Dollars or Kiwi or Euros or Pound or etc..... You had USD now you don't, doesn't make you short.
Curious, let's say I want to short dollars, so I sell the dollar index, what does that make me long? Let's say I want to go long dollars, so I buy the dollar index, what does that make me short?
Look up the term 'carry trades'. When holding for long durations, the impact of rates can be highly significant vis-a-vis directional movement. For a particular popular CFD provider/bucketshop, you can see impacts of borrow/lend rates here http://fxtrade.oanda.com/embed/show/interest_calc/1. TRY/JPY was actually a turbocharged carry trade over some periods last year before Turkish central bank governor got replaced by a less hawkish one and slashed rate. https://tradingeconomics.com/turkey/interest-rate Final note is another term for carry trade is "widowmaker trade". ;-) Mostly because retail traders get very greedy with leverage in order to make any sort of substantial profit.
I was referring to a physical bank. Completely different than a broker. If I buy/short the dollar index then I'm long/short the base currency of my brokerage account. If I exchange US$ for Pesos at a physical bank, I'm not short US$. I just have less US$ and more Pesos. I never have to buy back the US$ I used to purchase Pesos.