Please note forex tends to be traded with significant leverage. Therefore, the interest rate differences tend to add up very quickly. Generally someone who is trading an account balance of $10,000 will actually be trading up to $100,000 of currency at a time. This is significant because the 1% interest payment in our previous example would really be like 10% on the owners account balance. As you can see this interest really can add to your bottom line or eat into profits.

It is important to understand how interest is paid by your broker. The standard approach is that it is paid each day at a certain time. Basically if you make a trade a few minutes before the deadline and sell right after it you will participate in that exchange. Because forex does not trade the weekends, interest counts for three times the payment on Wednesday’s. These are called SWAPS and you will see in your trade log where money is added or subtracted from your trade for the swap. Now before anyone gets excited about jumping in and out of high yielding currencies before the deadline on Wednesday, please understand that you still have to pay the spread and the trade could move against you in the short period of time in between.

So how does this help you in your trading? For most traders the interest difference is not going to make a big difference on trading profits. If a trader tends to trade the same currency both directions, they may overall make a small net gain or loss on interest over a long period of time. Further, some trade may be so short lived that the trader never holds them during the SWAP period. Longer term position traders are most affected by SWAPS. They tend to hold positions for months or even years. In this case it s easy to see how interest can play a big roll. Some currencies have very high yields. For instance the GBP/JPY pays out a handsome SWAP. If the pound has an interest rate of 3% and the yen only 0.25% the net gain by going long the GBP/JPY would be 2.75%. As you can see trading $100,000 worth over the course of a month would yield you $230. If the trader held the position for a full year they would be paid $2,750. That would be a return of 27% on their $10,000 account. This is a great return, but there are obvious risks involved. If the currency moves down in value the trader could lose much more than the interest payment and result in a losing trade. The major benefit to trading in the direction of high interest is that it can help offset small losses so that you can hold the trade longer. This is precisely what they call the Carry Trade.

The Carry Trade occurs when speculators determine that over the long term a high interest paying currency is going to appreciate against a lower interest paying pair. Generally the Euro and the Pound have been high paying currencies and the Yen has been the lowest. Therefore, the GBP/JPY and EUR/JPY have been popular currencies to trade from the long side. The strength of the interest payment is a sign of the strength of the currency itself. Therefore, it is logical to hold long-term the high paying currency.

In summary for many traders the SWAP really does not affect the bottom line and should not be considered when deciding to make a quick daytrade. However, traders who are interested in swing to position trading would benefit best from selecting high yielding currencies.

A type of forex account in which a money manager trades the account on a client’s behalf for a fee. Managed forex accounts are similar to hiring an investment advisor to manage a traditional investment account of equities and bonds. Returns and fees between managed accounts can vary greatly; therefore, it is important to research your options thoroughly before assigning your account to a professional manager.

Some forex managed accounts are manually traded by the manager while others use automated software to place trades for them. Some use a combination of both of these.

Also check out: Forex Trading Robot

The typical spread on the EUR/USD currency pair in the forex market is 2 pips.  This is the difference in the price you can go long or short on the currency pair.  A pip is a 1 unit move on the price.

If the EUR/USD is trading at a bid of 1.5577 and an ask of 1.5579 then the spread is 2 pips from the two price quotes.

If you are trading a standard contract of $100,000 lot size the spread would cost $20 per trade.  If you were trading a smaller contract of 1 mini lot or $10,000 the spread would cost $2 per trade.  Therefore, the larger amount of money you trade the higher the spread is going to cost you.

Are you really getting a commission free trade?  To participate in the equities market you must have a broker carry out your trades.  Commission plans vary, but generally stock trades cost between $5-$10.  In this case we will use the higher price of $10.  When you buy a share of Microsoft there is also a spread.  The spread generally is one cent, one of the tightest spreads in the stock market.  If MSFT trades a bid of $24.03 and an ask of $24.04 then there is a spread of one cent per share.  Now if you were to purchase $100,000 worth of MSFT stock this would be 4,150 shares.   You must multiply the number of shares by the .01 spread.  This would cost $41 in the spread + the trade cost of $10 = $51 to buy $100,000 worth of MSFT.  Remember to control the same amount of money in the forex market it would cost $20.  Therefore, there is still a cost to trade in the forex market, but since you must pay a spread in the equity markets anyways, you really are saving some money by not paying a commission.  In the previous example we used MSFT, there are some stocks that trade with a spread of .05 to even .12  In this case the cost of the trade would be exaggerated even higher than the forex market.

The “black box” portion of the system contains formulas and calculations that the user does not see nor need to know to use the system. Black box systems are often used to determine optimal trading practices. These systems generate many different types of data including buy and sell signals.

Some forex robots simply alert you when there is an entry signal, while others are more complete trading systems that automatically place the trades, modify them, and close trades without any human intervention.

Trading robots remove the psychological aspect of trading and human error. They also allow you to be away from your trading desk as they automatically place trades for you.