Dear Sovereign Investor,
When I was young, probably 9 or 10 years old, I revered my grandfather, Dwight Meeks.
A man with an 8th grade education, my grandfather was an extremely successful landlord in our little town of 16,000 people. He used to say…
“If you can learn to spend less than you make and put the difference in something that will go up over time, you’ll become rich over time.”
What was my grandfather doing? He had found a way to become his own bank. He made his money earn interest and work for him.
So after years of saving and living beneath his means, he built up some nice interest. That interest allowed him to eventually buy more than 100 rental houses in our town.
He was so well known in our little town that you would think he was the mayor. But no, this was just a smart man who learned the power of compound interest.
That way, he was working and so was his money. Most people work for money… but never have money work for them. He learned the value of doing both. It made him rich and famous (at least in our little community).
Even as a kid, I was in awe. I wanted to do the exact same thing. It took me a couple decades – but I figured it out.
A Secret My Grandfather Missed in
the Currency Markets
In my early 30’s, I discovered a completely unique way to become my own bank. Up until that point in my life, I was a stock trader. So I was used to my stocks paying me quarterly dividends four times a year.
But in my 30’s, I learned about the currency market and how you could earn “daily interest” through your Forex account on currency trades.
I was fascinated. I’d never heard of anyone earning DAILY interest except for my bank.
If fact, after I heard this, I assumed this meant I could earn interest on each business day (5 days a week). But no! It was even better. With currency trading, I could earn interest seven days a week!
It’s a little-known fact in the currency market, but you can earn what’s called “rollover interest” on certain high-yielding currencies. All you have to do is hold these currency pairs overnight. Then your FX dealer pays you for holding these pairs.
I couldn’t believe it. This was simply amazing. How many investment strategies let you earn income every 24 hours that’s paid out five times a week? Not many.
Let me explain how it works…
The Nuts and Bolts of Being Your Own Bank
All you have to do is open up a Forex account with one of the brokers like FXCM, DBFX, Forex, etc. You can do this online through their websites.
Once you’ve funded your account… all you have to do is buy a high interest bearing currency vs. a low interest bearing currency.
For instance, the Australian dollar earns about 4.75% and the U.S. dollar earns less than 0.25%. So buy buying the AUD/USD pair, you’re earning 4.75% but only paying out 0.25% of that. So you’re netting roughly 4.50% on the position just from the interest differential alone.
Even better, you’re earning interest not on the amount you put down on the trade, but on the large position you’re controlling with your trade.
While you may only have a few hundred dollars of your money tied up in a $10,000 trade (by buying 1 mini lot), you’re earning interest on the position as if you owned the entire $10,000 position outright. Yet it only took a few hundred dollars in your account to control that position.
Now that’s exciting… putting up a few hundred dollars to earn interest on $10,000. I’ll do that all day long!
With most of the major economies yielding 1% or lower, the clear leaders in the “yield game” are Australia and New Zealand. They stand out above the rest.
Japan, Switzerland and the U.S. are the lowest yielders to pair against these high yielders. And with the distinct downtrend in the dollar, it’s made it the number one candidate.
When the Cash Register Rings Each Day
Okay, so you open your account online and you fund your account (via wire, credit or debit card, etc.). Then you’ve bought your first interest bearing pair… for instance, AUD/USD.
So when do you starting getting interest delivered to your account? This will happen at the end of each international trading day, which is at 5pm EST.
Your firm takes a snapshot of your account at 5pm EST. If you’re still holding the position at that time, then your account will be credited with that day’s interest on your position usually within the next hour or two.
It’s at that moment that you’ve just become the bank.
Imagine earning interest 365 days a year like a bank. When you sleep, you’re earning interest. When you’re on vacation, you’re earning interest. When you’re working… so is your money, at the same time.
Once you allow the interest to stack up over the course of a year or two, you’ll start to realize why some call “compound interest” the 8th wonder of the world.
Have a Nice Day,
Editor, Currency Cross Trader
4 thoughts on “Rollover Interest – Become Your Own Bank 365 Days a Year”
How would you deal with a position that went against you? Would not the lost pips offset any interest gained? Even assuming it was only a few pips, and assuming you went into a position right before the rollover, and exited right after the rollover? For example, if you were long AUDUSD before the rollover, and lost, let’s say 10 pips, plus whatever spread the broker you are using charges. Wouldn’t the lost pips and spread on the position offset the 4.50% interest gained?
It most certainly would. That’s why carry trading is risky in my opinion. However it can work out great IF you get in early on a big trend and just hold on to the position for as long as possible. Say for example if you bought GBP/JPY (popular carry trade pair) when it was at 142.00 around Jan 1999 and held on to it almost till the end of the uptrend at 251.00 you would’ve earned tons in interest.
I think carry trading accentuate profits IF you at some point do still close the position with a profit. In other words it’s a good idea to employ a trend following strategy on a currency pair that earns you positive swap (aka rollover interest), but to just hold on to a position no matter what JUST for the interest differential is in my opinion dangerous and almost downright stupid – especially if you don’t have a ridiculously large account so you can ride out the up and down waves.
This is good news. Thanks for sharing
Yes the carry trade can be very lucrative. The unwinds can be spectacular too 🙂 Interesting article, thanks
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