Learn Carry Trading
In forex markets, carry trading is an easy way to take benefit of the basic economic principle that money is constantly flowing in and out of different markets. Markets with a high rate of return will generally attract more capital.
Carry trading is quite popular among professional forex traders. Hedge funds and investment banks also do leveraged carry trading to make profits. You as a retail forex trader 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 use a simple example to make it clearer: lets assume, New Zealand dollar is offering an interest rate of 4.75% whereas 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.
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.
By entering into a carry trade, an investor expects to profit from an interest rate differential between the two currencies. But if the low interest rate currency appreciates considerably for some reason or another, 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!
You can use the MACD (moving average convergence divergence) indicator to identify the trend. - 23204
Carry trading is quite popular among professional forex traders. Hedge funds and investment banks also do leveraged carry trading to make profits. You as a retail forex trader 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 use a simple example to make it clearer: lets assume, New Zealand dollar is offering an interest rate of 4.75% whereas 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.
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.
By entering into a carry trade, an investor expects to profit from an interest rate differential between the two currencies. But if the low interest rate currency appreciates considerably for some reason or another, 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!
You can use the MACD (moving average convergence divergence) indicator to identify the trend. - 23204
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 @ 5:17 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home