Lesson 2: Interest Swap Advantage

First of all before I'll begin by mentioning if once we're done with the lessons, if the plan still remains unclear in parts this is OK as I will be recapping as time goes on.

Let's begin......

Anyone who is well versed in forex, and indeed anyone who has even been exposed to it knows one thing. Yes it's about currency pairs, and funnily enough currency pairs move. Sometimes the PA of the pair is fast and furious, sometimes it becomes sluggish, seemingly stuck in the proverbial quadmire. Which can be a tad annoying. It all depends on the fundamentals. There are more fundamentals than you can poke a stick at, every country plays the same game. There is a myriad of then like employment figures, interest rate changes, gross domestic product (GDP), you get the idea. It's just economic news released every month on every facet of a countries business activities. The market digests it and reacts (and sometimes overeacts) according. 

As for me I don't really get too excited about the economic or even the political arenas, not that it is unimportant, it is otherwise the market's wouldn't move. It is afterall the engine that drives the market. I just prefer concentrating on the technicals. Anyhow back to currency pairs, they only playout in three different ways. They: 

1. Trend

2. Range

3. Consolidate

These of which I won't go into now as I'll be sidetracking. I will cover them later but if in the interim you wish to know more just Google them.

Now what is it about swap rates that's so interesting? Right at the top of the post you will see three MT4 (for Android) screenshots.

In the order descending the first is a list of currency quotes, Using again the AUDUSD as an example I clicked on that pair which brings us to screenshot number 2, which shows a dialog box. Clicking on Properties brings us to the last screenshot 3.

Of the information shown what is of interest (no pun intended) is the long/short swap rates. Which are shown in points* as follows:

Swap long:   4.6

Swap short: -9

Which positioning looks most favourable? Going long or going short? Looks like the answer is self evident. Most of my trades can last from anywhere between 2 - 5 days on average. If I was to go short on this pair two things would happen. Every day I am in trade I would be losing 9 points. How much money this would equate to would depend on how much per pip you're playing with and how long your trade is open for. Remember interest rate swaps kick in on the beginning of the day's trade, which is 0800hours here in Australia's east coast.

So over the time whilst your trade is open this would erode your eventual profit (assuming your take profit (TP) is reached but however if you're unlucky it would increase your losses. This would be on top of the spread you paid your broker. Now on the other hand going positive has the opposite effect, by increasing your profit and minimising your losses. Which sounds like the best deal? Again it becomes self evident.

In the last post we looked at the same pair. PA was below the SMA on all timeframes right? That is why I said 'maybe' as to going short. It probably would have been successful but however not a reliable return on investment (ROI). See my point? 

Lesson number 3 will cover risk to reward. A crucial element in the plan.

* A point is 1/10 pip, so therefore in the example above if you executed the trade on $1.00 (0.10) a pip you would effectively be losing 0.90 cents a day from your floating equity.