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 take an example: suppose New Zealand dollar offers an interest rate of 4.75% while the Japanese yen offers an interest rate of 0.25%.
An investor who wants to capitalize on this interest rate differential will buy New Zealand dollars (NZD) and sells Japanese Yens (JPY). The investor can earn a profit of 4.75-0.25=4.5% as long as the NZD/JPY exchange rate does not change. If the investor uses a leverage of 10:1, this 4.5% return will be magnified into 45%.
The good thing is if the currency pair NZD/JPY appreciates, the investor can get a capital appreciation as well as a yield on the investment. Most of the time, the currency pair will tend to appreciate as many investors will jump on the bandwagon when they see a good carry trading opportunity. The more investors carry trade, the more the currency pair appreciates.
Carry trades will generally be profitable when investors have low risk aversion and unprofitable when investors have high risk aversion. In times of high risk aversion, investors tend to take refuge in safe haven currencies.
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.
How do you check the mood of the investors? By knowing whether the currency is overbought or oversold. For this you need to 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 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. - 23196
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 take an example: suppose New Zealand dollar offers an interest rate of 4.75% while the Japanese yen offers an interest rate of 0.25%.
An investor who wants to capitalize on this interest rate differential will buy New Zealand dollars (NZD) and sells Japanese Yens (JPY). The investor can earn a profit of 4.75-0.25=4.5% as long as the NZD/JPY exchange rate does not change. If the investor uses a leverage of 10:1, this 4.5% return will be magnified into 45%.
The good thing is if the currency pair NZD/JPY appreciates, the investor can get a capital appreciation as well as a yield on the investment. Most of the time, the currency pair will tend to appreciate as many investors will jump on the bandwagon when they see a good carry trading opportunity. The more investors carry trade, the more the currency pair appreciates.
Carry trades will generally be profitable when investors have low risk aversion and unprofitable when investors have high risk aversion. In times of high risk aversion, investors tend to take refuge in safe haven currencies.
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.
How do you check the mood of the investors? By knowing whether the currency is overbought or oversold. For this you need to 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 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. - 23196
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. 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 @ 4:48 AM
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