Forex Spread Trading – Things to Know
Spread trading is one of the most popular currency trading strategies to profit from the rollover fee differences of different currency pairs. Here the trader buys a high interest currency pair (buys a high interest currency like GBP, NZD and AUD against a low interest currency like JPY or CHF). The trader then, for hedging the position holding risk, shorts a low interest currency pair (e.g.: CHF/JPY) having great correlation with the first currency pair.
Fore example a trader buys 1,000,000 GBP/JPY for getting a rollover interest (daily interest credit of $200 - 250). But the exchange rate fluctuations of the currency pair and market movements can greatly alter the profit making opportunities. So for hedging the risk the trader shorts 1,000,000 CHF/JPY (daily interest payment of $20 - $40).
Shorting 1,000,000 CHF/JPY only equals around 542,000 pounds and thus the long position is only covered to that amount. But if the trader short equal Swiss Franc to over his open position (he need around 1,840,000 francs), that will be theoretically equal to opening a GBP/CHF position but at a higher cost (as the trader opened the position using JPY paying extra spreads). If the long and short currency pairs have reduced correlation, the scenario is even worsened. Thus thorough analysis of currency pairs and systematic mathematical modeling is greatly advised in forex spread trading.
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Fore example a trader buys 1,000,000 GBP/JPY for getting a rollover interest (daily interest credit of $200 - 250). But the exchange rate fluctuations of the currency pair and market movements can greatly alter the profit making opportunities. So for hedging the risk the trader shorts 1,000,000 CHF/JPY (daily interest payment of $20 - $40).
Shorting 1,000,000 CHF/JPY only equals around 542,000 pounds and thus the long position is only covered to that amount. But if the trader short equal Swiss Franc to over his open position (he need around 1,840,000 francs), that will be theoretically equal to opening a GBP/CHF position but at a higher cost (as the trader opened the position using JPY paying extra spreads). If the long and short currency pairs have reduced correlation, the scenario is even worsened. Thus thorough analysis of currency pairs and systematic mathematical modeling is greatly advised in forex spread trading.
NobleTrading.com Offers Online Stock Trading, Online Options Trading
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
posted by NobleTrading at
9:22 AM
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