Hi there 
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When GBP/JPY was at 240.00 or so, I told people in my forexdiamonds room that whoever had that trade as a carry, it was a great opportunity to take their profits and exit.Â
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Right now, as I am writing this, GBP/JPY is at around 232.67 as I am writing this, and I wanted to tell you that I feel that it’s a great opportunity to start going long and building this carry trade.
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Now, when you think about building a carry trade, you should not think in the same terms as you normally think when you trade forex. You have to use much lower leverage, and you have to become a lot more conservative.Â
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Carry trade is a lot more than just pips…carry trade is when you go long on GBP/JPY, and because UK has 5.25% rate, and Japan has 0.25% rate. When you go long on GBP/JPY, most honest brokers will pay you anywhere between 4.5% to 4.6% in annual interest, which is paid on daily basis. And when you have your account in dollars, and you are buying pounds, which is twice more expensive, that interest pretty much doubles and ends up being somewhere between 8.85 to 8.90% per year. So if you buy 100K of GBP/JPY you should be paid about $8500 per year in interest alone, not including the pips you lose or gain.Â
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When I think about a carry trade, I think in terms of amazing opportunity to generate very good passive income…similar to a real estate investment.
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As an example, I bought only 150,000 of GBP/JPY right now, and this particular position will be paying me over $1000+ per month of passive interest. That doesn’t include appreciation on that currency or depreciation of course… Of course, every time it goes down by a pip, I will lose $12.50 or so, and every time it goes up by a pip, I will gain $12.50 or so.Â
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At this time, I am actually begging that it drops another 3,000 pips in the next year, and as it drops I will be adding 75,000 to my position at every 500 pips drop interval. Now, what I just said may sound crazy, but it’s a crucial mentality to have when you think in terms of carry trades.
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When you start doing carry trades, you can’t think in terms of being a short term forex speculator, you have to start thinking in terms of being a long term forex landlord. It’s actually very funny. As I am writing this email today, I had a very interesting situation happen, which hopefully can put you in the right mentality for a carry trade. I had someone call me today, offering to sell me their house in Albuquerque, New Mexico for around $135,000. If I buy that house, I will be able to collect approximately $900 per month in rent net, after paying $50 to $100 per month to the management company to manage it there. I am planning to pay cash for that house, and what are my risks? Having had a number of houses, I know that the risks are that stuff will start breaking down, tenants may not pay rent on time. If I have to evict them, I will lose at least 3 to 4 months of rent, if not more. If they get pissed off in the eviction process, they can create $10,000 to $20,000 or more in damages to the house. I have to pay insurance, I have to pay taxes, and the list goes on and on.Â
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So I was driving today, I was thinking about this house deal, and at the same time, I was thinking about the GBP/JPY that I just bought. Basically…by buying 150,000 worth of GBP/JPY, it’s like I bought a house for $150,000 that’s going to pay me around $1,100 per month in rent, give or take $100 to $200 in case Japan hikes the rate, and the pair starts depreciating. I am guaranteed to be paid this money every single day like a clock. I don’t have to worry about renters, I don’t have to worry about paying property taxes, I don’t have to worry about paying insurance. I don’t have to fork out $150,000 in cash, I just need to make sure I have enough money in my forex account in case it starts dropping. And what happens if the pair drops 2,000 pips? Well, I’ll be down -$25,000 dollars. What is $25,000 to a $150,000 house? If your house depreciated from $150,000 to $140,000 simply because the land is not going up in value, and the house is getting older, would that really make you panick? Probably not… Automatically when you buy a house, you lose pretty much 6% on it, because that’s what it will cost you approximately if you wanted to turn around and sell it… What if you get a bad renter, he can easily cost you $10,000 to $20,000 in lost rent, maintenance, and damages by the time you get them out…Â
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Now, let’s talk about appreciation… Why do real estate values go up? Supply and demand, right? As an area gets more populated, they don’t make anymore land, so as the number of people increases that want to live in that area and invest in that area, the prices of houses go up. Let’s talk about carry trades. Let’s say you have a 150,000 position that pays $1,080 in interest per month, you could just as well compare it to a 150,000 house that pays $1,080 in rent per month. Wouldn’t you think that quite a few people would want to have that position or house? But for every buyer there must be a seller. Buyers want that passive income, and sellers don’t want to give up that passive income, so buyers start offering to sellers their positions for more money. That’s why GBP/JPY has shot up in the last year by 4,000 pips, to put it in most simplistic terms. So if you bought $150,000 position of GBP/JPY, not only would you collect $1,000+ of rent per month, but you would also see an appreciation in the amount of 33.3%. Now 33.3% is assuming that you paid for that position in cash in full…of course you may have used leverage, and only initially put $10,000 to buy that $150,000 position, so you would have actually collected $13,000+ in “rent” for the year, and have gained $50,000 in appreciation value. And now since that gain of 4,000 pips, it has dropped by 1,000 pips (from 242 to 232). All of a sudden I see an opportunity again to start building a carry that not only will give passive income of $1,000+ per month, but also has room to appreciate again.Â
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So all of a sudden, when you start thinking about a carry trade in those terms, it becomes a lot less scary and a lot more lucrative. If you have an account of $10,000, and you want to do carry trade with $150,000, that’s fine, but don’t panic if you are close to being wiped out if it takes further dip and be ready to add to your account if you don’t want your house to go into foreclosure :) Think of it in terms of real money of $150,000, don’t think of it in terms of 1.5 standard lots. And if the pair keeps dropping, assuming that interest rates still stay more or less the same, think of it as if you are in a real estate business, and all of a sudden you have an opportunity to buy the house for cheaper that will pay similar rent, and have even more opportunity for appreciation.Â
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And I am not even going to start talking about the underlaying fundamentals behind this trade, where the health of export heavy Japanese nation completely depends on their yen weakness, and how somewhat beneficial it is for the UK to have strong pound, which has allowed a lot of UK citizens to buy up massive amount of real estate in neighboring European countries, has propelled the travel services industry, and has widened profits for a lot of big companies as they sell expensive pounds to buy other cheap currencies, in order to buy cheap goods and raw materials from overseas, and then they resell it to their UK citizens for the expensive pounds again.Â
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I wrote this email not to necessarily get you all hyped up about carry trades. I wrote it mostly to keep you up to date on what I am doing and also to open up your mind to another great forex investment opportunity, but more than anything, I wanted to make sure that you learn to think in much more real terms when you do longer term carry trades. If you have a $5,000 account, and you buy 1 standard lot. Think of what would happen to you if all you had was $5,000 and you wanted to buy a $100,000 house. If that’s all you had, you’d probably lose all your money relatively quickly and would only benefit the realtor, the government, and the mortgage company. But if you had a bit more money, you could possibly eventually turn that $100,000 house into an amazing investment. Overleveraging and not thinking in real terms can kill you…and forex can be a deadly investment…but if you do it right, forex can be the most lucrative investment opportunity that exists out there…
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Wait for my signal later today for today’s review and tomorrow’s forecast for our short term fundamental trading strategy
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To Our Success!
-Felix Homogratus
1617 Broadway St., Suite 1001
New York, NY 10002
USA