Trading Intervals in Forex
- Trade intervals in this context refers to the length of time positions are held open in the account.
- Because there is no standard definition, it is helpful to think of trades as falling into one of two main types – intra-day trades and inter-day trades.
In Lesson 3, we looked at how most brokers use an end-of-day evaluation to determine the daily net interest for open positions. These positions are then closed and "rolled-over" into an identical position for the following day. Because day trades are closed prior to the end of the business day, day trade positions are not typically included in the interest calculation for your account.
- Commonly referred to as day trades, intra-day trades are opened and closed during the same business day.
- The length of time intra-day trades remain open could range from just a minute or two, to several hours.
- Intra-day traders hope to profit on the currency pair's volatility as exemplified in the following price chart.
- Note that even though the exchange rate fluctuated continuously between 14:00 and 16:00 hours, overall, the rate declined.
- In this case, taking a short position around 14:00 hours and holding it for only two hours, would have resulted in a gain of approximately 35 – 40 pips.
- An inter-day trade remains open overnight.
- Because these trades are held over from one day to the next, they are included in the end-of-day rollover and also the interest calculation for the account.
- Inter-day traders are usually employing one of the following three strategies:
- Trading a long-term view
- Establishing a carry-trade
- Hedging future currency exposures
Trading a Long-Term View
- A long-term view is the forming of an opinion on the future direction of an exchange rate.
- If you believe, for instance, that Japan's economy will contract over the next quarter, while the Eurozone countries led by industrial powerhouse Germany will expand, you might conclude that the euro will appreciate in value over the yen over the long term.
- To take advantage, you could go long the EUR/JPY with the intention of holding the position open for the next two to three months, or even longer.
- As time goes on and your assessment proves accurate (or not), you can close the position at any time at the current market price.
- Depending on the market price, closing the position will serve to either realize your gains, or limit your losses.
Eurozone – The name given to the collection of countries that use the euro as their currency.
Establishing a Carry Trade
- A carry trade is used to take advantage of the interest rate differential between the two currencies in a currency pair.
- The basic goal of a carry trade is to buy currencies with a high interest yield, while shorting currencies with a low yield.
- For your carry trade to be profitable, your long position must yield more interest than you are forced to pay for your short position. The difference is called carry, and if the carry is positive, you profit – if the carry is negative, you lose money.
- In addition to earning profit on the interest rate carry, you can also profit on a change in the exchange rate. Keep in mind however, that if the rate moves against you, it could eliminate any profit you earn through the interest, so you must continually monitor your carry trades.
- For more information on how forex brokers calculate interest on open orders, see End-of-Day Rollovers for Open Positions in Lesson 3.
Hedging Future Exchange Rate Exposures
- A future exchange rate exposure exists when you will be required to convert your own currency to a foreign currency at some point in the future.
- For instance, you could be faced with an upcoming payment that must be submitted in another currency, or you could be expecting some form of payment that will be converted from a foreign currency to your own.
- Both situations include an element of risk in that you cannot control future exchange rates.
- This means that your upcoming bill could cost you more than expected if your own currency loses value against the currency in which you must pay the bill.
- On the other hand, if your currency gains in strength and you are expecting a future payment, it will be worth less to you once converted to your own currency.
Using Spot Forex Trades to Hedge Future Exchange Rate Exposures
- To protect against an unfavorable change in the exchange rate in the future, you can enter into a spot market forex trade.
- For example, a UK resident intends to buy property in the U.S. later in the year. To think of this in currency trading terms, the buyer is long GBP and short USD.
- To protect against the dollar gaining on the pound before the buyer can complete the transaction, the buyer could sell GBP and buy USD, and hold this position open in a forex trading account.
- This effectively "locks in" the current exchange rate as the buyer is holding USD in the trading account.
- If the dollar gains in value, the buyer will receive more pounds back when the position is closed, and the extra can be used to buy USD.
- On the other hand, if the dollar falls in value, the buyer will still have the equivalent when converted to USD - which is the purpose of the hedge in the first place.
A word of warning before engaging in any long-term, inter-day trading – you will need to be able to withstand the normal fluctuations that will most certainly occur for any currency pair over a longer time frame. You may suffer through several days in a row where the price moves against you, but you must have the courage to stick to your strategy and remember that you are in it for the long haul.
Trends are rarely in a straight line and rates will fluctuate. But, if the overall trend is in the direction you predicted, you will come out on top. If you don't think you can handle this pressure, or if you question your ability to identify such opportunities, then this form of trading may not be appropriate for you.