A currency trader needs to leverage judiciously, though even with a relatively conservative leverage of 10:1, the NZD/JPY pair’s 7.5% yield would translate as a 75% return looking at it from an annual basis. If you held a 100,000 unit position in NZD/JPY and used $5,000 equity, $9.40 daily interest would be earned. Let’s move the figures on… after 10 days $94 dollars interest, after just three months $940 interest, or $3,760over a year. Pretty reasonable in anyone’s language considering the same amount  ($5,000) would only earn $250 in your bank savings account (at a 5% interest rate) after a complete year. Admittedly, the bank return is a risk-free option (or is it in the present economic climate?).

Leverage basically exaggerates market movements. It can increase profits hugely, and just as quickly it can cause large losses. These losses though can be capped by using stops and most Forex brokers offer protection via a margin watcher – software instructed to watch your position throughout the day and night, five days a week that automatically liquidates your position once margin requirements set are breached. The process ensures your account could never post an unwelcome negative balance and that the funds in your account dictate your risk limit.

Carry Trades

The dynamic nature of currency values, which never remain stationary, created the carry trade – probably the single most popular trading strategy of all time. Forex carry traders look at earning not only interest rate differentials between two currencies, but that their positions also appreciate in value. Plenty of opportunities have been available for big profits to be made in the past. Here are some historical examples worth looking at.

>>>  Click here to read Part 4 on Currency Trader Basics  >>>