Earning Interest And Watching Out For Debits In Forex Trading
When you enter the world of trading forex online, the world is literally your oyster when it comes to trading styles. If you’re in the game to catch big moves on a limited amount of trades, perhaps you’ll be more of a long-term investor. Another trading style is swing trading, which is somewhere between long-term investing and day-trading. Swing traders hold trades for a few days up to a few weeks. The next big trading style is day-trading, which is for the trader that can devote at least several hours a day to plying his craft.
Now let’s throw day-trading out the window for a minute because we’re going to talk about how you can earn interest with your forex trades. That’s right, you can make your forex trades work for you. The only way that this can happen is buying holding trades overnight, so that’s why we don’t consider day-trading in the forex interest equation. Earning interest from your forex trades has probably piqued your interest (no pun intended), but your first order of business should be to go over your forex broker list and review each broker’s interest and debit policies.
Here’s how you can gain interest in forex trading. Let’s say you go long the Australian Dollar/U.S. Dollar (AUD/USD) pair and hold it overnight. This is actually an ideal example because the interest you receive on a forex trade is dependent on the difference in interest rates set by the central banks of two countries in the pair. So you would subtract the U.S. interest rate from the Australian interest rate and that’s the amount of interest, in percentage terms, your overnight trade will earn. Remember that if you’re trading one standard forex lot, you would be earning interest on $100,000.
You’ll also need to remember that since banks are closed on Saturday and Sunday, interest earned for those days is calculated on Wednesday at 5 P.M. soon after the close of trading in New York. In fact, that is when all interest is calculated for every day of the week. At the close of the New York session.
There’s another side to the overnight trading equation and that is debits to your account. Let’s assume you sold short the AUD/USD pair and held it overnight. You better hope this trade goes in your favor in a big way because every day that the trade is held you’ll be PAYING interest on it. Said another way, if you short a pair where the first currency has a higher interest than the second, you’re account will be debited by the amount of interest you would’ve made had you gone long in that pair.
There are some tax considerations you’ll have to make when holding forex trades overnight as well. Keep in mind that interest earned from a forex trade is NOT considered capital gains income. It’s interest income just like you earn at the bank. The bottom line is earning interest on your forex trades is a great way to bolster your account balance. Just exercise caution when employing this strategy.