Multiplex

Currency Carry Trade



http://i.investopedia.com/inv/092009.../book_icon.jpg
What Does Currency Carry Trade Mean?
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

http://i.investopedia.com/inv/092009...y/inv_icon.jpg
Investopedia explains Currency Carry Trade
Here's an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.

http://www.investopedia.com/terms/c/...carrytrade.asp

To Carry or Not to Carry

When Do Carry Trades Work?

http://babypips.cachefly.net/school/.../half-full.png

Carry trades work best when investors feel risky and optimistic enough to buy high-yielding currencies and sell lower yielding currencies.
It's kinda like an optimist who sees the glass half full. While the current situation might not be ideal, he is hopeful that things will get better. The same goes for carry trade. Economic conditions may not be good, but the outlook of the buying currency does need to be positive.
If the outlook of a country's economy looks as good as Angelina Jolie, then chances are that that country's central bank will have to raise interest rates in order to control inflation.
This is good for carry trade because a higher interest rate means a bigger interest rate differential.
On the other hand, if a country's economic prospects aren't looking too good, then nobody will be prepared to take on the currency if they think the central bank will have to lower interest rates to help their economy.
To put it simply, carry trades work best when investors have low risk aversion.

Carry trades do not work well when risk aversion is high (i.e. selling higher-yielding currencies and buying back lower-yielding currencies). When risk aversion is high, investors are less likely to take risky ventures.
Let's put this into perspective.
Let's say economic conditions are tough, and the country is currently undergoing a recession. What do you think your next door neighbor would do with his money?
Your neighbor would probably choose a low-paying yet safe investment than put it somewhere else. It doesn't matter if the return is low as long as the investment is a "sure thing."
This makes sense because this allows your neighbor to have a fall back plan in the event that things go bad, e.g. he loses his job. In forex jargon, your neighbor is said to have a high level of risk aversion.
The psychology of big investors isn't that much different from your next door neighbor. When economic conditions are uncertain, investors tend to put their investments in safe haven currencies that offer low interest rates like the U.S. dollar and the Japanese yen.
If you want a specific example, check out Forex Gump's Piponomics article on how risk aversion led to the unwinding of carry trade.
This is the polar opposite of carry trade. This inflow of capital towards safe assets causes currencies with low interest to appreciate against those with high interest.

Read more: http://www.babypips.com/school/to-ca...#ixzz1SdiICo9m

1. What is Carry Trade?
2. How Do Carry Trades Work for Forex?
3. To Carry or Not to Carry
4. Carry Trade Criteria and Risk
5. Summary: Carry Trade

Read more: http://www.babypips.com/school/to-ca...#ixzz1SdiQKu9S

Carry (investment)

From Wikipedia, the free encyclopedia
The carry of an asset is the return obtained from holding it (if positive), or the cost of holding it (if negative) (see also Cost of carry).
For instance, commodities are usually negative carry assets, as they incur storage costs or may suffer from depreciation, but in some circumstances, appropriately hedged commodities can be positive carry assets if the forward/futures market is willing to pay sufficient premium for future delivery.
This can also refer to a trade with more than one leg, where you earn the spread between borrowing a low carry asset and lending a high carry one; such as gold during financial crisis, due to its safe haven quality.
Carry trades are not arbitrages: pure arbitrages make money no matter what; carry trades make money only if nothing changes against the carry's favor.

Contents

 

1. 1 Interest rates
2. 2 Currency
   1. 2.1 Known risks

3. 3 See also
4. 4 Notes
5. 5 External links

http://en.wikipedia.org/wiki/Carry_%28investment%29

The Carry Trade : How to Trade Using Interest Rates

The carry trade is one of the most popular strategies in forex trading because it guarantees some type return on medium or long term positions. Unlike most strategies for the forex market, carry trading does not seek to capture a profit by exploiting changes in the value of a currency pair, but instead focuses on the interest rate differentials in currency pairs. The ideal carry trade is one where the currency pair experiences little change in value but has a wide interest rate differential.

http://www.onlineforextrading.com/bl...o-movement.gif

What to Look For in a Carry Trade
1.Large interest rate differentials:
For example, the British Pound has a 4.50% interest rate and the Japanese Yen has a 0.50% interest rate. That is an interest rate differential of 4%. This means if you borrow Japanese Yen at 0.50% interest rate and invest it in the British Pound at a 4.50% interest rate, you will make 4% in interest on those borrowed funds.

2.Healthy Economy of the Higher Interest Rate Currency
In general, a country with a high interest rate should attract more foreign capital as investors seek the highest returns on their investments. The health of the economy should also be taken into consideration. For England, inflation above normal at 3% indicates interest rates may rise in the near future, which is typically good for the British Pound. High inflation isn’t always good, especially in the case of Zimbabwe. The interest rate in Zimbabwe as of October 2008 is 8500.00%. A carry traders deam? Absolutely not, with inflation topping 231,150,888.87% year over year in October, investing in this currency would be a very risky move

Popular Carry Trade Set-Ups
Because Japanese interest rates have been so low in the recent past, a disproportionate number of carry trades in the forex market have involved the yen. So, let's use the GBP/JPY for a basic example. Let's say you know for a fact that the yen and the British Pound are going to maintain a parity over the coming year with 0.5% interest for the JPY and 4.5% interest for the British Pound. Taking $10,000 and leveraging it 10:1 to buy100,000 units GBP/JPY you will earn roughly with 11GBP per day on that investment, or 4000GBP per year. With the GBP/USD at an average price of 1.75, you would make roughly $7000 on your investment of $70,000 without a single pip move in your favor. In an ideal situation, like the chart below, investor capital will also flow in the direction of the higher yielding currency and the trader will profit on that as well, but that is not the main goal of the carry trade.

http://www.onlineforextrading.com/bl...py-uptrend.gif
Carry Trade Dangers
Of course, the main danger with carry trading is the same with other types of longer-term forex strategies – the currency you are holding might depreciate against your home currency as is occurring in the chart below. If you suspect that this is going to happen, it is time for you to get out. Many carry traders will set their stops on long term carry trades at their trades entry point. This locks in carry profits and stops the trade before it takes position losses. Keep in mind that carry trading is a long term strategy and should be treated as such, so don’t stress out on intraday profits and losses.

http://www.onlineforextrading.com/bl...-downtrend.gif


http://www.onlineforextrading.com/le.../carry-trading

See #178

EURUSD, H1, 2011 July 20

Exit @ 1.4234 (DR1)

Profit @ +47 pips

Dear ForexCube

there have been big moves in the EUR/USD and it will be interesting to see how our trading colleagues handle this market. I see that you have your sell positions mostly around 1.4080 and your buys at 1.423x. This is quite a big gap for your hedges. Based on the information from the commerzbank in Frankfurt, they expect the E/U pair to raise up to 1.46 and once the US gets their act together it will go south in a big way.....but as you once said: You never know what monkeys will do next..... happy trading mate!

Have a nice day

larry

Hi Larry

Look at the closed EURUSD orders. These were my hedging positions.
1.4176 - 1.4232

Kindest regards
FXcube

EURUSD, H1, 2011 July 21
EURUSD, H4, 2011 July 21

Short @ 1.4372

demoing

Deming Cycle?
If somebody feels overcharged either way take your few indicator pull down menue and feel free to go away from this thread. Time and tide wate for no man. This thread are using the indicators described at p.1, #1 in evidence, no more and no less.

Forexcube, it's like you and I had the same idea on our minds.

Care to expand further on the Carry Trade concept - e.g. anything you're currently playing around with?

So far I've tried to create a Carry Basket, but my broker has made it difficult with their swap rates, or I'm just not creating a basket properly.

So now I had just recently researched Interest Rates of each currency and their fluctuations over time, then I found your recent post about Interest Rates and the Carry Trade.

NZDJPY, Daily, 2011 July 22

Short @ 67.84

Target @ 64.60

NZDSGD, Daily, 2011 July 22

Daily CCI Divergence, Stoch High, MACD High

Short @ 1.04445

Target @ 1.01250

Understanding the Basics of Forex Trading: Currency Pairs
By Joseph Ducat

The foreign exchange market, or Forex (FX) for short, is said to be the oldest international trade market. It is also the largest of all trade markets. Analysts have estimated the average yearly trading volume on Forex to be over a trillion dollars. The Forex is not an exchange centralized in any one place, and trading on it takes place 24 hours a day and seven days a week without pause.
To trade on this market, you have to understand what is being traded. Forex trading deals with world currencies. A trader buys and sells currencies by exchanging one form of money for another, with the goal of making a profit from the transaction. The market quotations in Forex specify pairs of currencies. They are depicted by showing the base currency followed by a different currency, for example: USD/EUR or GBP/USD.
The most commonly traded Forex currency pairs are considered to be:
EUR/USD: Euro vs. U.S. Dollar
GBP/USD: British Pound vs. U.S. Dollar
USD/JPY: U.S. Dollar vs. Japanese Yen
USD/CHF: U.S. Dollar vs. Swiss Franc
Here's how to interpret a typical Forex quotation. The currency that is shown first is generally known as the base currency, but it is known by other terms as well. It can be called the domestic currency or accounting currency or even be termed as the primary currency of a Forex currency pair. The currency that is shown in second place is called the counter or quote currency. The base currency is always equal to a single monetary unit of exchange (for example, 1 USD, 1 EUR, 1 GBP). This is generally implied and not shown. The quote currency is the amount of that currency that is able to purchase a single unit of the base currency. Forex currency pairs normally depict what is termed the "bid" and "ask" price. The bid price refers to the price at which the broker is willing to buy, while the ask price refers to the price at which the broker is willing to sell.
Let's take a look at a sample quotation. Consider a USD/EUR currency pair that is quoted as USD/EUR = 1.8. If you purchase this currency pair, you will receive 1 USD for every 1.8 euros that you sell. If you sell this currency pair, you will earn 1.5 euros for every 1 USD that you sell.

http://ezinearticles.com/?Understand...airs&id=427263

Hi the-game

Every Broker has different swaps. Generally I like to select those currency pairs which counterbalnce itself in their value by market turmoils when both deliver an interest income.

Actual GBPJPY Long (see the monthly chart below, please), in addition I wait for AUDCHF (Long Term Trade) when the cross rate should falling down around 1.71 for getting Long. Have set different Pending Orders between 0.70 - 0.75 and will hedge at M5/M15 this range as well. Also Singapore Dollar (SGD) seems on the right way. GBPHUF Sell was good, but be careful about the weekly chart now (see #201, please.), or GBPPLN Sell.

Take a look at "Crash-Neutral Currency Carry Trades" or "Evidence of Carry Trades Activity" in the attachment, please. May be it gives some aspects more.

Kindest regards
FXcube

AUDCHF, Monthly, 2011 July 22

The Forex Currency Pairs

http://www.instantforexincome.com/im...ency-pairs.jpg
Foreign Exchange trading is in general the trading of many currencies of the world. It is emerging as the largest and least regulated market providing the greatest liquidity to investors.
This trading is always done in pairs – Currency Pairs, one currency is bought and the other is sold. Together, they make up what is known as the "exchange rate".
For example, you may buy Euros with Dollars, anticipating that the Euro to increase in value relative to the Dollar. If the Euro rises relative to the Dollar, you sell the position and can earn a profit.

Most commonly traded currencies or the “majors” are:
US Dollar (USD)
Japanese Yen (JPY)
Euro (EUR)
British Pound (GBP)
Canadian Dollar (CAD)
Australian Dollar (AUD)
Swiss Franc (CHF)

Most commonly traded currency pairs are:
US Dollar and the Japanese Yen (USD/JPY)
Euro and US Dollar (EUR/USD)
US Dollar and Swiss franc (USD/CHF)
British Pound and US Dollar (GBP/USD)
While quoting currency pairs, the first currency is referred to as the base currency and the second as the counter or quote currency. The base currency is always equal to 1 monetary unit of exchange, for example, 1 Dollar, 1 Pound, 1 Euro.

Trading Forex Currency Pairs for Maximum Profit
It is also known as domestic currency or accounting currency and sometimes also referred to as the primary currency of a Forex currency pair. The price represents how much of the quote currency is needed to get one unit of the base currency.
When a currency is quoted against US Dollar, it is known as direct rate. Any currency not against the US Dollar is called a cross rate.
The quote currency is translated into a certain number of units of the base currency. This is also referred to as the foreign currency, secondary currency or counter currency. For example, if you find that a quote of USD/JPY is at 1.30, it says that for every 1 US Dollar, you get 1.30 Japanese Yen. When you quote for AUD/JPY of 67.73, it says that for every 1 Australian Dollar, you get 67.73 Japanese Yen.
Currency pairs are generally traded as 100,000 units of the base currency.

For example, if you were buying EUR/USD at 0.95 you would be paying Dollars for Euros as follows:
100,000 x .95 = $95,000 for 100,000 Euros

When you find a quote going up, it means that the value of the base currency is rising or in other words, it is getting stronger. If a quote is going down, it means that the base currency is weakening.

The dominant base currencies are:
Euro - EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD
British Pound - GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD
US Dollar - USD/CAD, USD/JPY, USD/CHF

The currency pairs are usually traded and quoted with a ‘bid’ and ‘ask’ price. The ‘bid’ is the price at which you are willing to buy and the ‘ask’ is the price at which price you are willing to sell.

For example, if the USD/EUR currency pair is quoted as - USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 euros that you sell, you get US$1. If you sold the currency pair, you receive 1.5 euros for every US$1 you sell.

The key to successful trading lies in selecting one or two pairs of currencies that you wish to trade in as a beginner. As you gain confidence, you may wish to add more pairs in your trading portfolio. But for a new trader or investor it is always advised to have limited pair just to ensure simplicity.

http://www.instantforexincome.com/currency_pairs.html

A Forex Carry Trade Strategy

Written by Betty Samang
The carry trade, which involves going long a high-yielding currency against a low-yielding one is very popular among long term currency traders. Nowadays, carry traders love the yen crosses due to the very low JPY interest rate, for example, the GBP/JPY or NZD/JPY cross currency pairs. Carry trades are typically held for several month or even years. Currently, when holding a long position in the GPB/JPY pair, forex brokers will pay out over $23 a day per 100,000 units in interest.

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 since you are planning to keep the trade for a longer time period. A carry trade can be an amazing opportunity to generate very good passive income ...similar to a real estate investment.

Daily rollover interest debit/credit Formula
Number of lots (Units) x (base currency interest rate - quote currency interest rate) / 365 days per year x current base currency rate = daily rollover interest debit/credit
GBP/JPY Carry Trade Example

Because UK has 5.25% rate, and Japan has 0.25% rate, this cross is very attractive for carry traders looking for buy opportunities only since they want to earn daily interest on the open position. Preferred timeframe's to make trading decisions are daily and weekly charts because they are looking to keep the trade for a longer time period. It really makes no sense to study a 5 min chart to take a carry trade.

http://www.aboutcurrency.com/images/...carrytrade.gif

A very simple strategy is the moving average cross over, looking to the above example, we only go long when the 5EMA crosses the 200SMA from below (up trend) but we do not take trades when the 5EMA crosses the 200SMA from above (down trend) because the carry trade strategy would focus only on interest-positive trades: in the case of the GBP/JPY, long trades.

When you are long GBP/JPY, most forex brokers will pay out over $23 a day per 100,000 units in interest which is paid on a daily basis. If for example, you keep the trade for 200 days, this would bring an amazing $4600* interest credited to your account not including the pips you lose or gain.

* The above calculation is an example only and is to be used for educational and informative purposes only since the amount actually debited or credited to your account will vary depending on the forex broker. Most brokers display the daily rollover interest fees on their online trading platform.

Carry Trade Strategy

 

1. Identify a pair like GPB/JPY with a high interest differential
2. Apply Technical Analysis and create a rule-based trading strategy using longer term timeframe's only
3. Only long the currency bearing the higher interest rate: in the case of the GBP/JPY, long trades
4. Keep an eye on the interest rate differential because it can vary over time

Another strategy is to open inversely correlated positions that are both interest-positive. This way, any losses in one currency's price would be (roughly) offset by gains in the other, while both earned interest. This is the idea behind a balanced basket of interest-earning currencies.

Interesting Carry Trade Pairs

All pairs that include the Yen due to the very low JPY interest rate.(date 02/15/2007)

http://www.aboutcurrency.com/strateg...strategy.shtml

Is the “carry trade” coming back?

The most important current fundamental for forex traders is the anticipation of an exit strategy from extreme accommodative policy in the West. When will quantitative easing and related monetary stimulus in response to the global credit crisis end? The central banks of the G7 are at a point where they are looking at ending stimulus and beginning to increase interest rates to slow down inflation, which depending on who you are talking to already is here or on the way. Some already have increased rates, and those that have not now are facing a post-quantitative easing era. Now is the time to prepare trading strategies that can benefit from this historic shift.
A key step for the forex trader is to realize that a change in interest rate policies across the globe will create ripple effects in almost every currency. When interest rates go up in one country, an imbalance is created in capital flows throughout the world. It is not necessarily the actual interest rate level that is important, but the anticipation that rate increases will continue; that attracts even greater demand for the currency. This is because of the "carry trade" where low-interest currencies are sold or borrowed against and the capital raised goes to the higher-interest-rate currencies. The carry trade collapsed in 2008 as capital had to be repatriated back by the borrowers who had to pay off bad debt. The yen, which has been a favorite funding currency in the carry trade, took a big hit when heavy yen buying followed the tragic earthquake in Japan earlier this year.

That was more of a temporary psychological reaction than one driven by interest rate fundamentals. The yen, with G-7 intervention, resumed a weakening direction and the yen carry trader, in-effect, has reappeared as a weaker yen is technically and politically favored. An easy way to detect the resumption of the carry trade as a strategy is to watch the iPath Optimized Currency Carry ETN (ICI). ICI is designed to reflect the total return of an "Intelligent Carry Strategy" and is now forming a triple top at $47. If it breaks out, it will be a clear signal that global conditions favor a carry trade revival (see "Back to the carry"). The challenge for the forex trader is how to participate in this powerful force.
http://www.futuresmag.com/Issues/201...rxTrd_Back.png
For traders to take advantage of increased interest in the carry trade, they must closely monitor interest rate differentials. When one currency is actually increasing rates while another is not, capital will flow away from that currency to seek the higher return. Following this pattern, several currency pairs can be traded to take advantage of carry as well as to anticipate increased differentials. For example, the EUR/GBP crosspair is likely to strengthen — if the European Central Bank raises rates and the Bank of England does not. Similarly the Swiss franc, a low-yielding safe-haven currency that has strengthened against the euro by over 3,700 pips in the last four years, finally may be able to weaken. The Swiss central bank desires a weaker currency and may keep rates low as the ECB raises rates.
The yen is likely to keep its status as the lowest yielding currency and as a result the AUD/JPY and EUR/JPY cross-pairs will receive the benefits of bullish sentiment. If rate increases in the G7 continue in the coming months, the Brazilian real will become more vulnerable to a sell off. Even though its interest rate is at an astronomical level of 11.75%, a change in its differential with other currencies may be the tipping point for weakening this currency. However, when it comes to the U.S. dollar, the situation is more tentative. The U.S. dollar is still a low-yielding currency and also may suffer from the carry effect. Yet, if Fed Chief Ben Bernanke signals the end of quantitative easing or signals vigilance on inflation, the U.S. dollar may attract investors and traders anticipating a potential rate hike. In any case, interest rate differentials and expected changes in interest rate differentials, rather than risk aversion, will become the major fundamental force for traders to contend with in the coming year. Forex traders should watch out, as the carry trade offers some extraordinary opportunities.
Abe Cofnas is the author of "Sentiment Indicators" (Bloomberg Press). He can be reached at [email protected].

http://www.futuresmag.com/Issues/201...ming-back.aspx

Icelandic Kronur: Lessons from a Failed Carry Trade

A little more than two years ago, the Icelandic Kronur was one of the hottest currencies in the world. Thanks to a benchmark interest rate of 18%, the Kronur had particular appeal for carry traders, who worried not about the inherent risks of such a strategy. Shortly thereafter, the Kronur (as well as Iceland’s economy and banking sector) came crashing down, and many traders were wiped out. Now that a couple of years have passed, it’s probably worth reflecting on this turn of events.

http://www.forexblog.org/wp-content/...ical-Rates.jpg

At its peak, nominal GDP was a relatively modest $20 Billion, sandwiched between Nepal and Turkmenistan in the global GDP rankings. Its population is only 300,000, its current account has been mired in persistent deficit, and its Central Bank boasts a mere $8 Billion in foreign exchange reserves. That being the case, why did investors flock to Iceland and not Turkmenistan?
The short answer to that question is interest rates. As I said, Iceland’s benchmark interest rate exceeded 18% at its peak. There are plenty of countries that offered similarly high interest rates, but Iceland was somehow perceived as being more stable. While it didn’t apply to join the European Union (its application is still pending) until last year, Iceland has always benefited from its association with Europe in general, and Scandinavia in particular. Thanks to per capita GDP of $38,000 per person, its reputation as a stable, advanced economy was not unwarranted.
On the other hand, Iceland has always struggled with high inflation, which means its interest rates were never very high in real terms. In addition, the deregulation of its financial sector opened the door for its banks to take huge risks with deposits. Basically, depositors – many from outside the country – parked their savings in Icelandic banks, which turned around and invested the money in high-yield / high-risk ventures. When the credit crisis struck, its banks were quickly wiped out, and the government chose not to follow in the footsteps of other governments and bail them out.

http://www.forexblog.org/wp-content/...-1998-2011.png

Moreover, it doesn’t look like Iceland will regain its luster any time soon. Its economy has shrunk by 40% over the last two years, and one prominent economist has estimated that it will take 7-10 years for it to fully recover. Unemployment and inflation remain high even though interest rates have been cut to 4.25% – a record low. The Kronur has lost 50% of its value against the Dollar and the Euro, the stock market has been decimated, and the recent decision to not remunerate Dutch and British insurance companies that lost money in Iceland’s crash will only serve to further spook foreign investors. In short, while the Kronur will probably recover some of its value over the next few years (aided by the possibility of joining the Euro), it probably won’t find itself on the radar screens of carry traders anytime soon.

In hindsight, Iceland’s economy was an accident waiting to happen, and the global financial crisis only magnified the problem. With Iceland – as well as a dozen other currencies and securities – investors believed they had found the proverbial free lunch. After all, where else could you earn an 18% by putting money in a savings account? Never mind that inflation was just as high; with the Kronur rising, carry traders felt assured that they would make a tidy profit on any funds deposited in Iceland.

The collapse of the Kronur, however, has shown us that the carry trade is anything but risk-free. In fact, 18% is more than what lenders to Greece and Ireland can expect to earn, which means that it is ultimately a very risky investment. In this case, the 18% that was being paid to depositors were generated by making very risky investments. As the negotiations with the insurance companies have revealed, depositors had nothing protecting them from bank failure, which is ultimately what happened.

http://www.forexblog.org/wp-content/...-2002-2011.png

Now that the carry trade is making a comeback, it’s probably a good time to take a step back and re-assess the risks of such a strategy. Even if Iceland proves to be an extreme case – since most countries won’t let their banks fail – traders must still acknowledge the possibility of massive currency depreciation. In other words, even if the deposits themselves are guaranteed, there is an ever-present risk that converting that deposit back into one’s home currency will result in losses. That’s especially true for a currency that is as illiquid as the Kronur (so illiquid that it took me a while to even find a reliable quote!), and is susceptible to liquidity crunches and short squeezes.

When you enter into a carry trade, understand that a spike in volatility could wipe out all of your profits in one session. The only way to minimize your risk is to hedge your exposure.

http://www.forexblog.org/2011/04/ice...rry-trade.html

Carry Trade Strategy

← Back to Forex Strategy List
Carry Trade strategy — it's one of the most popular fundamental Forex trading strategies. It's used not only by the common retail traders but also by the big hedge funds. The main principle of the carry trade strategies is to buy currency with a high interest rate and sell one with a low interest rate. Such setup offers profit not only from the currency pair's fluctuations but also from the interest rate difference (overnight interest rate). This strategy should only be applied under the normal global economic conditions. You should never use it during the crisis. Remember that your Forex broker should be one of those that actually pay overnight interest rate difference if you want to earn from it. You won't be able to earn from it if your broker is "swap-free".

Features

 

1. Long-term profit potential.
2. Two sources of profit.
3. Works only with the growing global economy.

How to Trade?

 

1. Choose a currency pair with a rather high positive interest rate difference (AUD/JPY, NZD/JPY and GBP/JPY are good historical examples of such pairs).
2. Go Long or Short on the chosen pair, depending on the direction with the positive overnight interest rate for this pair.
3. Choose moderate position size, so that it would be able to hold a significant paper loss.
4. Don't set a stop-loss (one of the few Forex trading strategies, where stop-loss isn't recommended).
5. Wait.
6. When you feel that you earned enough or you expect some global financial turmoil, close the position.

Example

http://www.earnforex.com/forex-strat...rade-chart.png

The example chart depicts a long-term "carry trade" growth of GBP/JPY from late 2000 till mid 2006. The pound had an interest rate of about 5% during the period, while the yen had its rate near zero, resulting in an overnight rate of about 5%, which is then multiplied by your leverage. With 1:100 leverage it's approximately 2,500% over the whole period. During the period GBP/JPY also rose by more than 6500 pips. As you see, the profit potential is simply outstanding.
The problem is that the uptrend ended very fast in 2007 and traders had little time to react and close the positions. The carry trade is quite risky and you should be very careful when deciding to use it.
Warning!

Use this strategy at your own risk. EarnForex.com can't be responsible for any losses associated with using any strategy presented on the site. It's not recommended to use this strategy on the real account without testing it on demo first.

http://www.earnforex.com/forex-strat...trade-strategy