Let’s face it, as a trader you’ve always been on the look for the best forex trade strategy that will not only bring you profits but as well as piece of mind that you’re trading is armed with a strategy that won’t let you down at least for several instances. From this aspect comes Carry Trade strategy which is one of the fundamentals of forex strategies. The attractiveness of carry trade is not only exclusive to the average traders as even the professional share common attraction to this particular forex strategy.
In carry trade, the traders’ eyes are on the currency that has high interest and then sell in exchange of currency that is pegged with low interest. This set up looks promising as traders get to profit directly from the currency’ pairs fluctuation. This happens due to the profits made through the difference of the overnight interest rate. However the set may only look good during a normal global economic condition or under a peaceful economic environment and should be avoided during crisis. It is from this simple principle that carry trade becomes a popular trading strategy.
Here are some of the best features of carry trade that may interest you as a trader
- You can expect to benefit from its potential to become long term trade
- You have two ways to earn or gain
- It is reliable during good economic condition
How it works
You choose your currency pair to trade. Take note of currencies that have high interest rate or choose among the pairs with history of low and high difference in interest rate. In many cases, the USA dollar and the Japanese Yen look promising. You can either go for short long term or do the long term trade but make sure that you aim for the overnight interest that is on the positive side. It is also important to choose position size that is suited to your trading plan to withstand any significant loss. In many cases, setting up a stop-loss is not recommended while using carry trade. The most important thing here is you have the ability to be patient. Close it when you feel you’ve earned enough or when you sense that a financial crisis is about to happen.
In many instances carry trade is brought about by speculations fielding the forex environment. Certain financial events like weakening currency may become the carry trade currencies and one currency as the funding currency choice. This is the time when traders and investors are risky and similarly optimistic in buying currencies. This is the condition when Carry trade works well. It also works well when traders have low risk aversion. For instance, if one country’s financial outlook seems far from being gloomy, the action of the central bank is to raise the interest rate to control inflation. This would mean higher interest rate difference and trader would benefit from it. It is clear that traders have lower risk compare when the country’s economy prospect isn’t looking good where the central bank will lower the interest rate to pump up their economy.
Carry trade works well on low risk rate conditions. Traders behave like that of a neighbor watching over his neighbors. If your neighbor is experiencing recession, it is but proper for you to put your investments and money in low paying investments rather than elsewhere when the investment is not a sure thing. You are prompted to put your investment in safer haven currencies like that of the USD/JP Yen which offer low interest rates. It just follows the forex jargon that your neighbor is deemed to as a high risk aversion.
To carry trade or not is your prerogative as a trader. While many are using it, it doesn’t follow it can work well to your trading plan. If some traders are blaming it for their loss or praising it for profits, it doesn’t mean it will be the same for you. Remember each is different from one and another. What is important is to know what actions to take when faced with conditions with low or high risk trading conditions. If you look at a half –filled glass as half -full or half –empty, it is your attitude and discipline that will work well with your trading strategy. Carry trade may be or may not be for you depending on how you perceived your half-filled glass.
