The bottom line is that you want to pick carry trades that benefit not only from a positive and growing yield, but that also have the potential to appreciate in value. This is important because just as currency appreciation can increase the value of your carry trade earnings, currency depreciation can erase all of your carry trade gains – and then some.
The carry trade opportunity was also seen in USD/JPY in 2005. Between January and December of that year, the currency rallied from 102 to a high of 121.40 before ending at 117.80. This is equal to an appreciation from low to high of 19%, which was far more attractive than the 2.9% return in the S&P 500 during that same year. In addition, at the time, the interest rate spread between the U.S. dollar and the Japanese yen averaged around 3.25%. Unleveraged, this means that a trader could have earned as much as 22.25% over the course of the year. Introduce 10:1 leverage, and that could be as much as 220% gain.
FOREX.com is a registered FCM and RFED with the CFTC and member of the National Futures Association (NFA # 0339826). Forex trading involves significant risk of loss and is not suitable for all investors. Full Disclosure. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. *Increasing leverage increases risk.
Let's say a trader has 1,000 USD on their trading account. A regular lot of '1' on MetaTrader 4 is equal to 100,000 currency units. As it is possible to trade mini and even micro lots with Admiral Markets, a deposit this size would allow a trader to open micro lots (0.01 of a single lot or 1,000 currency units) with no leverage put in place. However, as a trader would usually be looking for around 2% return per trade, it could only be equal to 20 USD.
If you are a rookie trader, you may find yourself asking questions such as 'what is leverage in Forex trading?' and 'how can it be useful?' This article will provide you with answers to these types of questions, together with, a detailed overview of Forex leveraging, its advantages and disadvantages, and a list of possible applications and restrictions.
To illustrate further, let's look at a typical USD/CAD (US dollar against Canadian dollar) trade. To buy or sell a 100,000 of USD/CAD without leverage would require the trader to put up $100,000 in account funds, the full value of the position. But with 50:1 leverage (or 2% margin required), for example, only $2,000 of the trader's funds would be required to open and maintain that $100,000 USD/CAD position.
Guaranteed stop-loss order (GSLOs) work in a similar way to stop-loss orders, with the main difference being that a GSLO has the effect of placing an absolute limit on your potential losses on a particular trade, as it ensures that your trade is closed at the price you specify. For this benefit, there is a premium charge that is payable on execution of your order. This charge is displayed on the order ticket. We refund this premium in full if the GSLO is not triggered.
For example, you might think the Euro (EUR) is going to increase in value against the Australian dollar (AUD) so you could place a trade to buy the EUR/AUD currency pair. If the Euro rises you would make a profit; if it drops you would incur a loss. Conversely, if you thought the Euro was going to decrease in value you could place a trade that would benefit from that price movement.
To trade $100,000 of currency, with a margin of 1%, an investor will only have to deposit $1,000 into her or his margin account. The leverage provided on a trade like this is 100:1. Leverage of this size is significantly larger than the 2:1 leverage commonly provided on equities and the 15:1 leverage provided in the futures market. Although 100:1 leverage may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading (trading within one day). If currencies fluctuated as much as equities, brokers would not be able to provide as much leverage.