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Can I buy and sit on something for a year?

Discussion in 'Beginners Bootcamp' started by atljoe, Oct 27, 2007.

  1. atljoe

    atljoe Recruit

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    OK… Beginner question. I think the EURO is really going to keep on going up against the US dollar. Can I do a buy and just sit on it for the next year. Or does the FOREX not work like that?
     
  2. 3BlackCrows

    3BlackCrows Corporal

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    Hi atljoe,

    It all depends on what makes you think the pair will keep going higher.

    If it's a hunch, then I wouldn't recommend it but if it's sound technical and fundamental analysis then go for it.

    You will need a fair amount of capital though to cope with a drawdown if the trend turns against you when you enter.

    My guess is that you may be entering at the wrong time as the pair seems very over extended and will soon be due for a correction of some sort.

    If that happens, it's best to get in once the correction finishes.

    In saying that though, currencies will go where they want to go regardless of what anyone says.

    My advice would only to be very careful at this stage.

    Hope this helps - Happy Trading! :)
     
  3. No Time

    No Time Private, 1st Class

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    yo atljoe,

    FOREX seems to me more of a speculation market rater than an investment tool.

    If you want to hold and sit, make sure you know the pair is going up from here and will make you a profit when you want to get out.

    And have alot of $$$$ to start.
     
  4. nmmm

    nmmm Private

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    Hi
    yes you generally can. However, on most brokers, you play/trade on margin.

    I trust you know what marging is - You use 1000 USD, but you dont have them, you garanty them with 100 USD (I assume you are american, thats why I give example with USD). Then If you lose more tham 100 $, the broker automaticly close (sell/buy) your possition, because you lost your "garantia" money. Send me a message if you do not understand what I mean, and I will explain.

    So, as you see, you do not work with your own money, but you "borrow" from the broker. Now lets explain what carry trade is (at least in forex meaning):

    Every country has a central bank, and the central bank deside what the interest rate will be. There are lot of speculative/alternative stories about FED, ECB and so on. Just forget about them for the moment.

    So lets assume you want to play EUR/USD:

    EUR - EU(rope) - ECB(bank) - interest rate = 4.00%
    USD - USA - FED - interest rate = 4.75% (used to be 5.25% before)

    So lets say you selling USD and buy EUR. This means EUR/USD long. For simpliciy, lets assume exchange rate is 1.40. So:

    Selling 1400 USD (interest rate 4.75)
    Buying 1000 EUR (interest rate 4.00)

    Every night, at 24:00, your broker
    debit 1400 x 4.75 = 66.50 / 365 USD, and
    credit 1000 x 4.00 = 40.00 / 365 EUR

    Same calculation can be done in different way:
    1000 * (4.75 - 4.00) = 7.50 / 365 EUR DEBIT - this is debit of 0.02 EUR/day.

    However, you do not want to open just 1000 EUR. You want to open 100,000.00 EUR or more. Then these 2 cents became 20 EUR every day.

    So you see this is not practical :)

    p.s. if you sell EUR, and buy USD, then you will get money every day. However the USD will be losing value faster than money you receive meanwhile.

    p.s.s. Interest rate in Japan is 0.50 %. What many people do, is go long on AUD/JPY, and receive this carry trade interes (6.50% - 0.50% = 6%). For 1000 AUD/JPY this means - 60 AUD profit every day (~50 EUR). However, if yen raise unexpectedly, the loss on AUD/JPY possition may wipe all profits you made.

    p.s.s.s. These are not a trading advices :)

    Nikolay
     
  5. Cyclon

    Cyclon Company Representative

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    R U Kiddin me?

    You would do ok for maybe a month but how does 1.2000 sound to you? You do know what a correction is don't you?
     
  6. nmmm

    nmmm Private

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    Cyclon - is this related to my post?

    Nick.
     
  7. Pharaoh

    Pharaoh Colonel

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    You can buy something for an extended period (weeks, months, more). That's called Position Trading. Even if you are 100% correct on the long term direction of the EURUSD, you need enough money to cover the inevitable swings against you or you'll get a margin call. Position traders also need to be very aware of the swap rate interest, since this can enhance or reduce profits.

    I believe that most of us in this forum do day trading and some may also do swing trading (trade that lasts for over a day, but not long enough to be called position trading).
     
  8. nmmm

    nmmm Private

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    Pharaoh,
    you are 100% right, but this I thought is obvious.
    Nick.
     
  9. Pharaoh

    Pharaoh Colonel

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    It is, but sometimes a thorough detailed explanation can help.

     

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