Carry Trading Thread

I currently trade some exotic pairs for their interest rate yield, should I get any capital gains from a trade that's a bonus.

Am I crazy? No I just realized that in this markets volatility I haven't come across an EA or strategy that works for me (since I have a full time job right now as well)

What does that mean? I buy/sell FX pairs in only one direction (the one that has positive yield). Generally carry trading is not seen as too sexy, this is slower than even the millipede strategy -- however over the course of 6 months it has (for me anyway) returned 10.5% return without me losing any sleep at night and I'm looking to do about 20% return for the year without too much trouble.

For example:

Current interest rate of USDTRY on the sell side is 5% you can find current interest rates here.

Having said that on OANDA (the broker I currently use) is offering 5.25% for the borrow rate. This makes carry trading the USDTRY Forex pair extremely interesting at this time - using the right leverage of course.

You can see how much interest is gained daily using this currency interest rate calculator here.

So OANDA currenty offers $0.13 per day for every 1000 units short. My actually trading strategy in order to open these positions is based on levels of consolidation over time and fib etc.. Nothing too fancy. The point of it is to maximize my open positions in order to get as much yield per day as possible without major drawdowns (so I use leverage sparingly).

10% to 20% return doesn't seem like much, but it takes little effort, no EA's that bust up your account or crazy technical analysis (and believe me i've been there with all the indicaters and what not.

Risks: The main risk here is massive capital depreciation given soverign risk especially with exotic EURO based FX pairs like USDHUF that can have dramatic swings in price due to changes in interest rate yield or USDZAR etc... that would essentially nullify returns through interest rate yield.

Having said that if leverage is used sparingly the risk of large negative moves can be mitigated to some degree.

Also given that nearly all of the major yield generating currencies like USDZAR, USDHUF, USDTRY and USDINR are correlated to some degree there is also very little mitigation of risk when diversifying over large time spans.

The final drawback of this strategy is that a lot of capital in your account is required to get a decent actual dollar return but does a great job on a percentage return basis.

Anyone else carry trading? Willing to keep the discussion going??

if you only looking for interest rate or yield, why you dont try to hedging the same currency to limit the risk? lets say you open 1 account with broker who provide interest rate and 1 account with broker who dont provide interest rate. You open at the same time buy position with the broker who provide interest rate and sell position with broker who dont provide interest rate. If one account is up another account is down. so your job is balancing those account and using the right leverage so it don't get margin call soon.

Example :

A account 1000 units, B accounts 1000 units

if A gain 1000 +100 = 1100 then B down 1000-100=900

or

if A down 1000 - 500 = 500 then B gain 1000 + 500= 1500, you can move the 500 gain at B account back to A account to keep the balance.

in the end you will not get any gain or downside exposure. because your balance always 2000. Except you get the gain from interest rate of course.

I think 1:10-20 leverage is ideal so you dont get busy with the balancing routines.

Yea, that's definitely an option, however I have a hypothesis that currencies such as USDTRY and others like it that have a high interest rate yield as well as fast growing economies will over time have their currencies appreciate substantially. This thesis is borne out when you look at AUDJPY and other JPY FX pairs as well as some academic papers.

What I don't want to have, is be stuck in positions that I may have to hold on to forever in the negative given the hedge. Also most FX brokers do not offer the same currency pairs as OANDA so it does limit it me there as well.

Not a bad idea in times as volatile as the current one right now but for me not a solution for super long term trades where you expect high interest yielding currencies to appreciate over the span of years.

I'm surprised so few people are carry trading at all given the responses in this thread. Seems like everyone is looking for those 100% per month capital gain growth..

I'm not.

Some people can't handle and/or don't like to see floating losses and apparently it's really cool to be a trader on this forum rather than an investor but I was doing a bit of carry trading with A/J the last few years. I trade low leverage as well.

Scaling in and out with multiple positions on a currency (sometimes 20 or more) has really helped in dealing with floating losses as there is always quite a number of trades that are positive to help balance out negatives, however your point is taken - II suppose there's not many that are looking at ultra long term views versus active daily trading.

Yeah, sure. I was actively trading around the floating loss but when I wasn't in the mood for trading it was nice collecting the rollover for doing nothing. I didn't see the floating loss any differently than having some money tied up in a bank earning next to nothing. But it's not a method I would recommend.

You also have to consider that your broker might get bought out/taken over by another broker. Like FXSol recently. I heard that traders' positions were closed when the changeover happened so if you were in loss at that time, it would have been a bit of a blow to the account.

I'm not actively pursuing this method anymore. I'm trying my best to be a trader.

Hey Patience I remember seeing your account on myfxbook quite some time ago growing 2-5% per month - I remember because I figured you were using some grid strategy (This was quite some time ago). If I remember correctly this was before the big JPY sell off a few years aback (as you were mostly in AUDJPY If i remember correctly). You inspired me at the time to keep this strategy moving along. Did you quit the strategy after the big blow up of JPY during the market crash 2008-2011 ?

Gosh, what a good memory you have. I don't think I had that account up for that long either.

I have been carry trading since September 2009. It wasn't a grid strategy. To be honest, I got a bit lazy with it all. I found that I was taking sub-standard trades with the thought in the back of my mind that if the trade didn't work out it didn't matter because I'd just carry it. And you know this cross can be volatile. I got caught a couple of times with the fat finger meltdown in May 2010 and then again with the Tsunami meltdown in March 2011. I think I had a floating loss of around 20% at one stage with the Tsunami meltdown but the rebound was fast on that one.

I've now upped my position size but am trying my best to be more picky about the trades I take. Still on A/J but I've been dabbling with AUD/CHF the past few months. Still low leverage though but it's quite rare that I am caught carrying anything anymore. A couple of nicely timed short-term trades with my larger position size trounces the rollover I used to earn anyway and there's no floating loss. My main problem now is getting myself motivated to trade.

With Oanda having FIFO do you have several accounts? Do you also have a separate sub-account for shorting when the need arises?

Indeed, the positive carry JPY pairs all have a mean streak when things start to fall -- hence why I stay away from them completely right now. They tend to appreciate like crazy and then tank just as quick.

I'm much the same I have larger position sizes but particular about where I enter and exit trades.

As for Oanda, no I don't hedge, so don't require multiple accounts so much - I generally scale in and scale out only in interest rate yield direction with particular position sizing depending on where the currency sits against multiyear trends. I never trade against the carry position however I get out of positions when total dollar goals are reached or certain key price levels and essentially close out all of the positions positive and negative at once.

This looks VERY interesting. I am an investor and trader but have always had difficulty in making constant returns being a trader. As an investor (stocks) it is easy, 20%-30% return annually and now I have started reading on Forex with the interest rates and carry over investing.

Looking at the AUD/JPY over the past 10 years this seems like a guaranteed strategy to make money with great returns, interest + pips. But I can see you need a fair amount of capital to do so.

My only concern with any currency pair is the stability. AUD/JPY is pretty stable but can it maintain that going forward? That is probably unknown. Looking at the USD/ZAR it seems to be in a constant growth always going Long but currently it is 9.88 where it was once 3.00. This results in an almost bottomless pit.

Higher interest currencies with higher volatility = more risk. Unlike stocks where ultimately the bottom is 0, with Forex its a bit more tricky. The only way I can see to manage this is to use a bit of hedging to sustain the losses.

I am still going to research this further, give it a try and see how it goes. Thanks for the info