How To Carry Trade?
In currency markets, carry trading is done by many investors to take benefit of the basic economic principle that money flows where the returns are high. This constant flowing in and out of capital between the different markets is what makes carry trading profitable.
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 means taking benefit of the interest rate difference between two currencies. Carry traders take benefit of the interest rate differential between two currencies by buying or going long on the high interest rate currency and selling or going short on low interest rate currency.
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%.
An investor will want to benefit from this interest rate differential. He/she will buy New Zealand dollars (NZD) and sells Japanese Yens (JPY). He/she can earn a profit of 4.75-0.25=4.5% so long NZD/JPY exchange rate does not change. If the investor can handle leverage and uses a leverage of 20:1, this 4.5% return will be magnified into 90%.
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.
However, carry trading depends a lot on the mood of the investors as a group. When investors have low risk aversion, carry trades will be profitable. But suppose the investors as a group suddenly develop high risk aversion and run to take refuge in safe haven currencies. In this scenario, carry trading will become unprofitable.
When an investor enters into a carry trade, an investor expects to profit from an interest rate difference between a currency pair. But in case, low interest currency appreciates considerably for different reasons, carry trade will become unprofitable.
Before carry trading, it essential that you identify the current trend of the currency pair and see whether it is moving in the right direction!
MACD (moving average convergence divergence) indicator can help you in identifying the trend. Enter the trade when MACD crosses the zero line from below and exit when it crosses the zero line from above. - 23208
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 means taking benefit of the interest rate difference between two currencies. Carry traders take benefit of the interest rate differential between two currencies by buying or going long on the high interest rate currency and selling or going short on low interest rate currency.
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%.
An investor will want to benefit from this interest rate differential. He/she will buy New Zealand dollars (NZD) and sells Japanese Yens (JPY). He/she can earn a profit of 4.75-0.25=4.5% so long NZD/JPY exchange rate does not change. If the investor can handle leverage and uses a leverage of 20:1, this 4.5% return will be magnified into 90%.
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.
However, carry trading depends a lot on the mood of the investors as a group. When investors have low risk aversion, carry trades will be profitable. But suppose the investors as a group suddenly develop high risk aversion and run to take refuge in safe haven currencies. In this scenario, carry trading will become unprofitable.
When an investor enters into a carry trade, an investor expects to profit from an interest rate difference between a currency pair. But in case, low interest currency appreciates considerably for different reasons, carry trade will become unprofitable.
Before carry trading, it essential that you identify the current trend of the currency pair and see whether it is moving in the right direction!
MACD (moving average convergence divergence) indicator can help you in identifying the trend. Enter the trade when MACD crosses the zero line from below and exit when it crosses the zero line from above. - 23208
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 @ 5:14 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home