There has been a lot of discussion lately on trading forex and carry trades were one of them. Some traders utilize them as part of their strategy, others don’t. Here is what you should know.
There are many different ways to look at trading the Forex, and while each trader will have his or her own strategies for getting ahead in the market, carry trades are one type of currency trading that have a large following and it really isn’t hard to see why. Because different currencies are being traded and being leveraged at a large level, differing interest rates can actually have a major effect on whether a trade is profitable or not. This is a type of currency trade that should interest many traders.
Just What Is a Carry Trade?
A carry trade takes one currency that has a very small or virtually no interest rate and trades that major currency against another one that has as high an interest rate. The difference in interest rates allows for the trader to collect the interest on the leveraged money. This interest is added into the profits or added to off-set the loss in any carry trade on the Forex market. This is something James Edwards, the guy behind complete currency trader ( completecurrencytraderbonus.com) is using in his day to day trading strategy to have a very high success rate.
So if there’s a 2% difference in interest rates between the currencies being traded and a trader is using $10,000 to leverage $1 million, if their trade is open at the end of a day, they can collect the interest that would be earned from that $1 million. This can help recover pips on a bad trade, turn a break even trade into a good one, and turn a good one into a great one. That is the potential beauty of a carry trade, giving something of a safety net while also providing additional profits to add onto any good trade that gives you a net gain.
What Currencies Are Involved in Carry Trades?
The truth is that any currency pair can be used as long as one has a very high interest rate and one has a low interest rate. Because of abnormally low interest rates in many nations after the Great Recession of 2008 there are many different nations that currently can be one side of the trade. However, normally the Australian Dollar (AUD) and the New Zealand Dollar (NZD) are popular for these trades because their banks tend to be more aggressive in keeping higher interest rates.
On the other side, the Japanese Yen (JPY) is known for consistently having the lowest interest rates out there in order to foster rapid economic growth. The idea is to get the currency pair with the highest interest rate paired up with the currency with the lowest. This is why pairing the AUD or NZD with the JPY was so popular. This is also going under the assumption that you see a trade you like. A badly botched trade can’t be saved by interest rates alone.
Keep an eye on the right things
While the quality of the trade still matters first and foremost: you always want to catch a trend going in the right direction. The Forex market is volatile and while the carry trade is a very nice bonus and can lead to massive profits over time, if you don’t get the trade right consistently then you won’t see the benefit of the interest rate differences. If you are looking for a good training course, make sure you check out the video below, from the author of complete currency trader: