Profiting from interest rate differentials.

Hi all,
I had been considering an old thread out of Merlin that was speaking about interest rates, and also how a few places (ie oanda) cover attention. As he pointed out this is on average is a terrible thing, as if you're trading currencies that you get stung by the gap between their interest rates for buy and sell. Unless as he also pointed out you adhere to only those trades with good (or at least positive) differentials. This limits you to 50% of feasible trades, however as I was planning to picked 4 currencies to trade this doesn't seem like such a huge thing.

I only need to make sure I have this right.

If I buy 1 lot (100,000) of say AUD/JPY at which the interest rate differential is 5 percent (I don't know exactly) then each day this trade operates you get
100,000 * 1 * (0.05/360) = 13.88 AUD in interest. This is just over 1 pips, however you get this done every day. It appears like that the AUD/JPY moves approximately 40 pips per day, so if you're searching for the medium term you add only over 1 pip per day to your position. (On the other hand if you market AUD/JPY you shed only over 1 pip per day).

Of course you've got to have the ability to risk 100,000 over a few days. . But it actually doesn't matter on how big this trade. It works out as 1 pip per day on whatever level purchased. This seems to increase profitabiliy a lot if medium - long term trades would be the move. Yes you limit yourselve but if the buy signals were good for the trade, then sticking to interest rate differentials pairs increases your chances significantly.

I am *very* new to the entire Foreign Exchange game (still obtained 10 or more months of paper trading to go before I will start for real), and I am just in the process of studying everything I can about it, so please forgive me if this is a stupid question.

Dave