OVERNIGHT INTEREST forex

In my previous eBooks I typically omitted the topic of overnight interest because most of the trades I taught you were “day trades” meaning that you entered and exited the trade all in the same day. Because “Sailing” involves trades that last for multiple days (hopefully weeks or even months) then you should now be made aware of what overnight interest is and how it affects you. When you trade Forex what you are actually doing is you are entering into a contract to exchange currency with someone else in the world. Essentially you are agreeing to deliver (for each lot traded) $122,000 USD cash in exchange for €100,000 EUR (assuming an exchange rate of 1.2200). The reason why an armored truck doesn’t drive up to your door to deliver all this money, and no one is mad at you for not having delivered them their money is because your broker automatically “rolls over” your trade into the next day as they assume that you don’t actually intend to deliver nor take delivery of actual currency (if you really want to do this then contact your broker to not automatically roll over, but I doubt that you’d want to do this). Ok, so why do you have to pay “overnight interest”? It is because nobody expects you to drop-ship the money today (you have two days to settle the trade), thus while the money is still in your hands they’ll be charging you interest for holding onto it, but you also get to charge them interest for holding onto your money. If worldwide interest rates were all the same then we wouldn’t need to worry about “overnight interest”, because what you would owe them would be cancelled by what they owe you. In the real world, however, there are different interest rates imposed by the various world governments, and so what you have to observe is the net difference in interest. Note that on Wednesday you get charged (or credited) three times the regular overnight interest because the settlement period (if you were to actually deliver the cash) would happen over the weekend, so you get a “3-day rollover” from your broker, hence why the Wednesday overnight interest is three times as large as normal. So how do you calculate the interest? The formula is simple: (1 day interbank deposit rate for the base currency) minus (1 day interbank deposit rate for the counter currency) = equals interest rate differential Forex Sailing 21 then divide the interest rate differential by 365 and that gives you the daily differential then multiply the daily differential by the total open position in currency pair, then divide by 100 If I just lost you then don’t worry about this stuff, your broker will calculate all this automatically for you anyhow. Brokers usually post the interbank rates somewhere on their websites so you can go to look it up if you want to. The reason why I’m not providing you with the interest rates here is because they change from time to time. Ok, say you’ve made a trade on EUR/USD. Today the interbank deposit interest rate for EUR is 2.00% and USD is 3.50%. Let’s say you traded one lot (100k) and were long EUR, short USD, then this is how it would look: Long EUR (2.00) – Short USD (3.50) = -1.50 -1.50 / 365 = -0.004110 (-0.004110 x 100,000) / 100 = 4.11 Therefore 4.11 EUR would be debited from your account. If you were to trade in the opposite direction then 4.11 EUR would be credited to your account for the overnight interest. Assuming an exchange rate of 1.2200 then 4.11 EUR equals 5.01 USD. If you are trading in a mini account, or with some brokers even a regular account, then regardless of whether you should be receiving overnight interest or be paying a small amount they will ignore what you should either receive or pay out and simply charge you a flat 1 pip overnight interest. This is a ripoff! Some brokers will charge/credit you appropriately, but some brokers will nail you with the 1 pip charge regardless. For the above reason you should carefully select the broker you’ll engage in “Sailing” trades with (I later suggest a good broker for this). This can make a huge difference for you! Let’s say that you entered into a trade on EUR/USD that lasted 60 days (counting weekends). If your broker charges you 1 pip per day then you’ll pay them $600 per lot traded! If you were long EUR/USD with another broker then you would earn $300.60 in interest (meaning you would do $900.60 better on that trade than with the other broker), or you would only pay $300.60 interest if you traded in the opposite direction (saving you $299.40, roughly half, from what that other broker would have Forex Sailing 22 charged). Either way it is far preferable to trade with a broker that charges you overnight interest like this. NEW BROKER INSTRUCTIONS In my previous eBooks I recommend that you use either FXCM or RefcoFX as your Forex trading broker. As I’ve stated in “Forex Scalping” that recommendation isn’t because I consider them to be the best brokers overall, but simply because they are the best brokers, in my opinion, to use for a new trader. Other reasons aside, the primary reason that I suggested you use them is because their trading platform is so easy to use. A newbie trader with limited understanding should relatively easily figure out how to place market orders, entry orders, stops and limits. Other brokers’ trading platforms are more complicated and far less intuitive for implementation of trades. When you are learning about Forex trading it is better to stay with the simpler to use brokers (FXCM & RefcoFX) as you don’t need to clutter your mind with the mental gymnastics needed with the more complicated brokers. But by the time you are reading this eBook, “Forex Sailing”, I would now consider you to be somewhat more advanced in your understandings and ready to learn about the more complex brokers’ trading platforms. There are two additional reasons why it is important to learn how to work with these more complicated trading stations. 1. Some other brokers offer you a more competitive pip spread on currency pairs. If you are utilizing tiny-stop trades that are better suited for currency pairs with smaller spreads then you’ll have more currency pairs available to you to trade with. For example, one of my favorite pairs to trade is GBP/USD, however I get a 3 pip spread with other brokers whereas FXCM currently gives a 5 pip spread on this pair. Obviously I wouldn’t trade that pair with FXCM if I can get a more competitive spread. 2. In the eBook “Forex Scalping” I promised to share the secret of which broker (at the time of this writing) still guarantees stop orders under all volatile circumstances (i.e. FA), which means that you can sleep easy at night not worrying that something bad could happen to blow out your account. I will discuss this topic and reveal the broker a little later in this section. Forex Sailing 23 Before you continue reading this section please be aware that at first reading this can seem quite confusing. If you are new to Forex and are already feeling a little overwhelmed with all that you are learning then it may be best to skip reading this section for now. If it takes you a while to grasp these concepts then don’t worry about it. It took me a long time to wrap my brain around these ideas when I was learning it (and sometimes I still have to pause to think about it). Most authors who have explained these steps seem to explain it clear as mud and you have to really think about it. I’ve thought about how to explain this stuff to you in the easiest way I think I can so that you’ll have a somewhat easier time learning this. I hope the above paragraphs didn’t scare you off, as it is not my intent to do so. After a little while all this will become easy for you. In this section I’ll explain to you how to place the following order types: Market, Stop, Limit, Trailing Stop, OCO, If-Then, If-Then OCO, and explain GTC & GFD. That stuff is relatively easy to understand but more importantly I’ll explain how to understand “Stop vs. Limit” orders (it’s not what you think). I am showing snapshots from the broker “ACM”, but the general ideas shown here will work the same with most other brokers.