How To Carry Trade?
Carry trading is done by forex traders to take benefit of the basic economic fact that money will flow where it will get high returns. This constant flow of capital between the different markets is what makes carry trading possible.
Carry trading is a popular trading strategy employed by professional forex traders. Hedge funds and investment banks use leveraged carry trading as one of the favorite strategies. Retail forex traders can also benefit from carry trading.
Carry trading strategy entails going long or buying a high yielding currency and simultaneously going short or selling a low yielding currency. Carry trading tries to take advantage of the interest rate differential between two currencies.
Lets make it clear with a simple example: suppose New Zealand dollar is offering an interest rate of 4.75% while the Japanese yen is offering an interest rate of 0.25%.
In order to carry trade, an investor buys New Zealand dollars (NZD) and sells Japanese Yens (JPY). As long as the exchange rate between the NZD and JPY does not change, the investor will earn a profit of 4.75-0.25=4.5%. Using a leverage of 5:1, this 4.5% return will be leveraged into 22.5%.
If the currency pair NZD/JPY appreciates, the investor can get a capital gain as well as a yield on the investment. When there is a carry trade opportunity, many investors jump on the bandwagon. The more investors carry trade, the more the currency pair appreciates.
It depends a lot on the mood of the investors as a group. If investors as a group have low risk aversion, carry trading will be profitable. But if the investors as a group suddenly develops high risk aversion, carry trading will become unprofitable.
However, if the low interest currency appreciates to some extent for different reasons, carry trade will become unprofitable. In such a scenario, the more the low interest currency appreciates, the more unprofitable carry trading that currency pair will become.
So it essential when you determine a currency pair for carry trading, you also identify the current trend of the currency pair to see whether it is moving in the right direction.
MACD (moving average convergence divergence) indicator can help you in this regard. You should enter the trade when MACD crosses the zero line from below. You should exit the trade when it crosses the zero line from above. - 23221
Carry trading is a popular trading strategy employed by professional forex traders. Hedge funds and investment banks use leveraged carry trading as one of the favorite strategies. Retail forex traders can also benefit from carry trading.
Carry trading strategy entails going long or buying a high yielding currency and simultaneously going short or selling a low yielding currency. Carry trading tries to take advantage of the interest rate differential between two currencies.
Lets make it clear with a simple example: suppose New Zealand dollar is offering an interest rate of 4.75% while the Japanese yen is offering an interest rate of 0.25%.
In order to carry trade, an investor buys New Zealand dollars (NZD) and sells Japanese Yens (JPY). As long as the exchange rate between the NZD and JPY does not change, the investor will earn a profit of 4.75-0.25=4.5%. Using a leverage of 5:1, this 4.5% return will be leveraged into 22.5%.
If the currency pair NZD/JPY appreciates, the investor can get a capital gain as well as a yield on the investment. When there is a carry trade opportunity, many investors jump on the bandwagon. The more investors carry trade, the more the currency pair appreciates.
It depends a lot on the mood of the investors as a group. If investors as a group have low risk aversion, carry trading will be profitable. But if the investors as a group suddenly develops high risk aversion, carry trading will become unprofitable.
However, if the low interest currency appreciates to some extent for different reasons, carry trade will become unprofitable. In such a scenario, the more the low interest currency appreciates, the more unprofitable carry trading that currency pair will become.
So it essential when you determine a currency pair for carry trading, you also identify the current trend of the currency pair to see whether it is moving in the right direction.
MACD (moving average convergence divergence) indicator can help you in this regard. You should enter the trade when MACD crosses the zero line from below. You should exit the trade when it crosses the zero line from above. - 23221
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading; stocks and forex. Read about Trend Forex System. Best Forex Signal Service. Learn Forex Trading.
posted by X - Men @ 4:52 AM
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