Carry Trade Explained - How Forex Trading Makes Money Long Term

The carry trade is one of the less understood ways to make money investing, but ultimately is used by all of the largest, most sophisticated investors to preserve wealth and diversify risk amongst economies. I took time out to write a series of articles about the carry trade, and forex trading in general. Here is a brief piece published around a week ago which scratches the surface with more information available via links at the end of the article.

Carry Trade Explained
By Steve B Wise
The carry trade explained as it relates to interest rate differentials between countries is the most common use of the term in actual market practice. The concept begins fairly straight forward like any other investment. Raise capital (either borrowed or equity) and then lend it at a higher rate somewhere else. The carry trade explained this way does not obviously capture all of the complexity of the mechanics of actual trades however it does help to start trying to understand the position from its basic roots: interest rate differentials.
How a Typical Investment Might Be Established
Among the most common uses of rate difference trading is leveraged borrowing of large quantities of one foreign currency (and paying one interest rate) and lending/investing a different currency (in the same gross quantity) in another currency at a different (higher) rate. This results in a rate gap (owed versus earned) which nets the investor a small amount of profit per dollar invested daily. Generally this amount is quite tiny on a dollar for dollar investment, which is why investors typically use very high leverage to increase the daily profits to a meaningful amount.
Carry Trade Explained: How Leverage Makes Rate Differentials Worthwhile
Note that while we mentioned a moment ago the amount of profit on a dollar for dollar equity investment in a forex interest rate differential trade is small (a $10000 investment might yield $1.20/day), when leveraged up to a typical high water amount of 100:1 leverage that daily profit becomes $120/day, a typical living wage in the United States. In truth most investors will go with something more conservative like a 10:1 ratio or perhaps 20:1 (making a $100,000 equity holding pay out the same $120/day at 10:1).
What Forex Pairs Are Used in Interest Swaps in Today's Market
Trade positions typical in today's market are spoken of as going long AUD/JPY or alternatively long AUD/USD, meaning borrowing at today's low rates in the United States and Japan, then lending that same dollar amount in Australian dollars collecting a daily fee along the way.
See a detailed example of the carry trade explained, including a forex margin account example.
Steve B. Wise
Article Source: http://EzineArticles.com/?expert=Steve_B_Wise
http://EzineArticles.com/?Carry-Trade-Explained&id=5272141

I hope this carry trade explanation whet your appetite for more information on this high yield / high risk investment strategy. While the leverage involved in trading forex is quite high, the rewards can be substantial and consistent when managed appropriately. We'll be making up a couple of these carry trade positions in the not too distant future and when we close them we'll share the results.

Learn more about Forex Trading

Establishing Your Comfort Zone for Options Trading

Establishing your options trading "comfort zone" is the most important step to take before taking the plunge and making trades.  What kind of "comfort zone" am I talking about?  I am talking about making trades using options contracts which require no further attention on your part and give you the ability to walk away from the computer terminal and not look back.  And oh, by the way, the reason you'll have this confidence is that you aren't worried about losing money on the trade - the only concern you have with the trade is WHEN you are going to get your PROFITS on the trade.  THAT'S what I mean when I talk about a COMFORT ZONE in options trading.

When I started writing this blog I made some assumptions about how much you know about options trading.  I have assumed that you know the basics of put and call contracts, and what circumstances (market direction) make them profitable.  If you haven't got a clue about options trading, this blog probably isn't the place for you: it'd probably be best if you picked up a beginner's book to get the basics first.

For those of you still reading, what do you think will give you the most confidence in making options trades?  Want to know the biggest secret? Would you believe there is one critical advantage you can have over nearly every other trader in the market - a critical advantage that will MAKE YOU MONEY in options trading.

The Critical Advantage in Options Trading Is CONFIDENCE

How do you get the kind of confidence I am talking about?  It is way easier than you think.  While you may think the market is extremely intimidating and full of sharks and schisters trying to steal your money (it IS intimidating, and there ARE sharks, and they ARE trying to steal your money), the truth of the matter is that the vast majority of traders are under MUCH GREATER PRESSURE than you are.  Taking advantage of the pressures that others are under is HOW YOU CAN BE COMPENSATED IN THIS MARKET. Once you understand what gives other traders heartburn (and avoid doing what they do) you can build the kind of confidence you need to start making trades AND THEN WALKING AWAY... WAITING FOR THE MONEY TO COME IN.

Why Do Other Option Traders Feel So Much Pressure

That's the million dollar question, isn't it?  Look at yourself.  What pressure are you under?  Do you have overwhelming bills to pay?  Did you lose your job?  Do you have medical bills?  What anchors are you carrying around in your life?  Want to know the secret to successful options trading?

TRADERS WITHOUT ANCHORS MAKE MONEY CONSISTENTLY.

But wait, you say - if traders are making money then they don't have anchors like bills and such.  WRONG!
The anchors causing you worry OUTSIDE YOUR TRADING ACCOUNT have to be cut FIRST. 

The First Principal of Successful Options Trading Is Trading Without Anchors

Consistent successful options trading involves taking monetary risks that can result in TOTAL LOSSES. The successful trader understands this and ONLY TRADES MONEY HE IS WILLING TO LOSE. Yes, WILLING is bolded in the prior paragraph.  We are talking about contracts which (if they expire out of the money) are WORTHLESS.  If you can't accept the risk of 100% losses DON'T TRADE OPTIONS.  This principal also applies to pressures OUTSIDE your account as well... Which leads to my second fundamental principal of successful options trading.

SUCCESSFUL OPTIONS TRADERS DON'T TRADE WITH THE MORTGAGE MONEY.

Trading With Money That Is Borrowed or Isn't Free to Lose Is Sure to Be Lost

Does that make it clear enough?  Trading with money designated for basic suvival needs (food, shelter, health) is A HUGE ANCHOR. Successful options traders are TRADING WITHOUT ANCHORS. If you are trading money that has an achor attached to it you are at a HUGE DISADVANTAGE in the market, and on average YOU WILL LOSE.

I will write more later, but your mind should be pretty well stirring now.  If you've already traded options (and lost money), you ought to beginning to figure out why by now.  More soon.