Posted by forex at 3:38 AM
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1. Identify the current yields on currencies. Your broker's trading platform will provide real-time information. Select a base currency -- the numerator of the currency pair -- that is yielding a high interest rate and a counter currency with a low interest rate. Buying a currency pair is equivalent to buying the base currency and selling the counter currency. For example, if the British pound is yielding 5 1/2 percent interest and the Japanese yen has a half-point interest rate, you would want to purchase the GBP/JPY currency pair in order to capture the rate differential of 5 percent.
2. Establish entry and exit points. Traders use technical and fundamental analysis to predict how exchange rates will change over time. Adverse changes in exchange rates can wipe out any income from interest; a trader needs to know when to abandon a position because of unfavorable changes in exchange or interest rates.
3. Determine trade size and leverage. A standard forex trading lot is 100,000 units of base currency, and margin is available up to a factor of 100-1. Increased leverage (that is, a higher margin ratio) increases risk and potential return.
4. Place your order for the currency pair. Specify trade size, leverage factor and prices for entry, stop-loss and take-profit transactions. The stop-loss price denotes the maximum loss you are willing to sustain before abandoning your position. The take-profit price closes out your position for the specified amount of profit.
5. Monitor your daily gain and losses. Interest income is equal to the daily interest rate differential multiplied by the trade size. This is the amount of interest that is rolled over at the end of the trading day. Add the interest income to the gain or loss because of changes in the exchange rate. This is your daily profit or loss.