How To Maximize Profits With The Carry Trade Strategy In Forex
January 5, 2010 by Forex Guide
Filed under Forex Tutorial
Many day traders have to stay glued to their computers in other to catch some pips form trading in the global currencies market. The stress of staying glued to the computer, burning fuel and having to pay high fees for internet connectivity that most times keeps one stranded often result to burn out for many a trader. This is particularly frustrating especially when you have to sit down waiting for the erratic and unreliable internet services offered by most of the providers in the country to stabilize.
This frustration sometimes lasts for hours and (sometimes) days, only for you to notice that you were unable to catch up with the big moves. Imagine spending a whole day and night to catch some pips but were denied access due to poor internet service or no electricity supply and you have got a faulty generator set.
Then the challenge of coping with high volatility in the markets rears its ugly head to worsen the whole matter, turning you into a day rat hunter. Some have considered throwing in the towel because of their huge losses in day trading. Others think this is not real at all.
Don’t quit trading yet. There is a strategy that mighty just be the right for you at a time like this. You may have maintained an unbeaten run in the market, but you can still do better with this strategy. It is actually a strategy for both medium and long term investments in currencies trading. You do not need to have millions of dollars to apply the strategy we are to discuss here. With your $1000 or $2000, you can do it and still make huge profits without hanging your heart in the balance once you do the right things and follow the principles that make the strategy tick.
IT IS CALLED CARRY TRADE STRATEGY
In this article we will look at what carry trade is in the real sense of it, carry trade example, how to set up a carry trade order, currencies applicable to carry trade and finally some of the brokers that offer the carry trade strategy.
CARRY TRADE
The carry trade is an extremely popular trade in the FX market. It is made possible by the fact that different countries have different benchmark interest rates. At the time of writing this article, Japan’s benchmark interest rate was just 0.10%, whilst the benchmark rate for Australia was 3.25%. Interest rates fluctuate based on economic conditions. It is USUALLY the case when one benchmark rate is on an upward trend and another country’s benchmark rate is on a downward trend, the currency on the upward have been best implemented. The chart shows a steady increase of GBP/JPY pair in 2005 and 2006, spawned, among other things, by carry traders gong long to obtained the interest rate rental.
A carry trader who took advantage of the interest rate differential in the GBP/JPY would have had the following profit, had he/she brought one standard lot of the GBP/JPY at about the same time last year, and decided to sell a year later.
SETTING UP THE CARRY TRADE
To become a successful carry trader, understanding the role that interest rates play in the FX market is a crucial task. A country offering high interest rates will attract more capital as investors seek to capitalize higher returns. As interest rates rise, investment will follow, which can in turn increase the value of the currency.
Carry trader’s main focus becomes the expectation on the direction of a country’s interest rate, to ensure their high rate of return expectation on the direction of a country’s interest rate, to ensure their high rate of return.
Generally, traders seek to buy countries with high interest rates, and seek to short currencies who offer low interest rates.
MARKET CONDITIONS FOR CARRY TRADER STRATEGY
Carry trader works best under certain market conditions, and the selection of the currency pair can make the difference between a losing and a profitable trade. When selecting the currency pair, traders want to observe two things. On the one hand, the trader wants to make sure he is buying the currency that has the higher interest rate and is selling the currency that has a lower interest rate in comparison. On the other hand, the trader also wants to view the health of the economy for the currency pair to ensure the market will move to his/her favour. Essentially, the trader will be buying a currency with a stronger economy and selling the currency with a weaker economy.
CURRENCIES PAIRS FOR CARRY TRADE
Some currency pairs that are usually selected to apply the carry trade strategy are: GBP/JPY, GBP/CHF, AUD/JPY, EUR/JPY, CAD/JPY, and USD/JPY/ although, some exotic currencies like the South African Rand, Turkish Lira etc can also be used for carry trade, but beware of high spread and volatility and difficulty in accessing them in the news.
BROKERS THAT SUPPORT THE CARRY TRADE STRATEGY
The following brokers allow carry trader on their platforms: FXCM, Alpari, SAXO Bank, Oanda, etc. Please confirm from your broker and know their conditions.
Thanks for reading
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