T2W Trading Community

Believe it or not you can even open trades on interest rates. In fact the there are more and more products entering the market every year. It makes my mind boggle as to what they will add next. It's all very good news for us, as it supplies us with an added means of making money from a financial movement in a particular product, old or new.

Interest rate trades may seem a little strange at first, but stick with me and they will soon make sense. Just remember that the trade works just the same as they have before - BUY (LONG) SELL (SHORT) etc. and you profit is the difference between you opening and close prices.

The key difference you have to realise and take note of regarding interest rates is what the prices quoted to you actually mean. At present there are two differing trades that you can open with most financial bookmakers.

Short-term Interest Rates (STIRs):

A short term interest rate trade, allows you to open a position on the direction of various countries' 3-month interest rates.
If you plan to trade interest rates, its obvious that you start trading your countries own interest rate, as news on your local interest rate is quick and easy to come by. Most daily newspapers, TV etc. have the local interest rate available at hand. Remember though to use this as a guide. As the trading with which we are involved is linked to that of the futures markets and therefore they are more volatile.

The price of the contract that is opened is the number 100 minus the actual interest rate figure. Therefore a price of 94 signifies that the interest rate would be 6%, a price of 97 would mean 3% and 100 would obviously mean that there is no interest rate at all, which unsurprisingly I've yet to see.

If you think the interest rates will fall you simply BUY, go LONG and if on the other hand you think that the interest rates are going to up you. That’s correct... you SELL go SHORT on the trade. Simple really.

Dealing in interest rates is very similar to dealing in Gilt Edged securities. Isn't it funny that when we hear these terms, they sound so difficult that we assume trading in them would be incredibly difficult. Yet as we have proved over and over, the banks want you to believe that in order to help them keep their jobs and impose their charges.

Let’s look at an example just to clarify:

If we take UK interest rates as an example, if only because they are my local interest rates. The trade can be any interest rate you chose from any country, regardless of your location.

We believe that the short term interest rates will rise so that the price of 3 month sterling deposits (sometimes called short sterling) will fall in value.

Therefore we decide to sell go SHORT on 3 month sterling deposit (because interest rates we believe will rise, interest rates rise value of UK currency falls as becomes less attractive globally). The quotation we receive on sterling deposits are minus the decimal point 9030/9070 (first price is SELL (SHORT)/ second is BUY (LONG)) We decide to go SHORT/SELL at 9030 on March short sterling at £10 per point. The price of interest rates rise, the values of sterling deposit futures fall to 89.90 and we buy to close the trade. Which works out at a 40 point difference between our opening (9030) and closing prices (8990), equivalent to a £400 profit.

Remember the price that we get quoted on is not the interest rate itself. It is on the local currency value, e.g short sterling UK, going up or down as a reflection of the interest rate change. I told you they can be a little tricky.

Long-Term Interest Rates

Now just to make things a little more confusing for you, I am going to throw long term interest rate futures at you. Long term interest rates are reflected in the price of government bonds. Government bond futures allow you to trade on the long term rise or fall of interest rates from around the globe. All you have to remember is that BOND prices rise when interest rates fall and vice versa when interest rates rise and bond prices fall. So we either buy (LONG), or sell (SHORT) on that particular country’s bond.

An example would be useful again, I think:

We believe that interest rates in the US will fall and therefore the US T Bonds will rise as result. So we decide to go LONG on the US T-Bond March contract.

Now I don't want to freak you out here, but T-Bonds are quoted in fractions - no I don't like it either. So we get a quote of 98-20; which works out as 98 & 20/32nds. We get a quote of 98-17/98-23 so we go LONG at 98-23 @ $10 per point.
The interest rates fall, T-Bonds rise in value and we sell at the quote of 101-11/101-17 closing the trade at the sell to close point of 101-11. Working our profit out is simple:

Opening Price: 101-11
Closing Price: 98-23
Profit 84 32nds = 84 x $10 = $840

Now I don't want you to think that this is becoming way too hard. I am just showing you the various markets that you can trade. You can also trade options but I won’t go into those, leaving them for another time. Your main 'bread and butter' will be earned trading using share prices, which are quick and simple to trade and follow. The other trades I am listing here are merely for your reference, so when you invite your bank manager around for dinner in your new house, you can sit smugly as he tries to blind you with his knowledge - or lack of it.