Can I do a buy and just sit on it for the next year?

Recently posted from me in one forum, I changed some sentences to be more clear:

Quote:

Can I do a buy (EUR/USD) and just sit on it for the next year?

Yes you generally can. However, on most brokers, you play/trade on margin.

I trust you know what marging is - You use 1000 USD, but you dont have them, you garanty them with 100 USD. Then If you lose more tham 100 $, the broker automaticly close (sell/buy) your possition, because you lost your "garantia" money. Send me a message if you do not understand what I mean, and I will explain.

So, as you see, you do not work with your own money, but you "borrow" from the broker. Now lets explain what carry trade is (at least in forex meaning):

Every country has a central bank, and the central bank deside what the interest rate will be. There are lot of speculative/alternative stories about FED, ECB and so on. Just forget about them for the moment.

So lets assume you want to play EUR/USD:

EUR - EU(rope) - ECB(bank) - interest rate = 4.00%
USD - USA - FED - interest rate = 4.75% (used to be 5.25% before)

So lets say you selling USD and buy EUR. This means EUR/USD long. For simpliciy, lets assume exchange rate is 1.40. So:

Selling 1400 USD (interest rate 4.75)
Buying 1000 EUR (interest rate 4.00)

Every night, at 24:00, your broker
debit 1400 x 4.75 = 66.50 / 365 USD, and
credit 1000 x 4.00 = 40.00 / 365 EUR

Same calculation can be done in different way:
1000 * (4.75 - 4.00) = 7.50 / 365 EUR DEBIT - this is debit of 0.02 EUR/day.

However, you do not want to open just 1000 EUR. You want to open 100,000.00 EUR or more. Then these 2 cents became 20 EUR every day.

So you see this is not practical...

p.s. if you sell EUR, and buy USD, then you will get money every day. However the USD will be losing value faster than money you receive meanwhile.

p.s.s. Interest rate in Japan is 0.50 %. What many people do, is go long on AUD/JPY, and receive this carry trade interes (6.50% - 0.50% = 6%). For 1000 AUD/JPY this means - 60 AUD profit every day (~50 EUR). However, if yen raise unexpectedly, the loss on AUD/JPY possition may wipe all profits you made.

p.s.s.s. These are not a trading advices :-)