Skip to main content

Learn Forex Carry Trade Strategies

What is a Carry Trade?

A carry trade is when you buy a high interest currency against a low interest currency. For each day that you hold that trade your broker will pay you the interest difference between the two currencies as long as you are trading in the interest positive direction.
Carry Trading- Equidious Research.png

Carry Trade Offers Two Ways To Profit

The forex carry trade is a type of strategy in which traders sell currencies of countries with relatively low interest rates, and use the proceeds to buy currencies of countries that yield higher interest rates.
Forex carry trading leverages the differences in interest rates between countries. For example, one country’s central bank may lower interest rates in order to create economic stimulation, while the central bank in another country maintains higher interest rates.
In effect, the forex trader borrows money in one country with a lower interest rate, and invests it in another country with a higher interest rate, and keeps the difference in yield as profit.
A positive-carry forex trade (or simply “carry trade”) means that the position has a positive spread between the interest rates of the currencies. The carry trade strategy can capture this spread, and the profits depend on the leverage applied through the mechanical trading system.

How does carry trading work?

Carry trading offers forex traders an extra dimension of profitability. When the carry is positive, the forex position can accrue positive income even while market fluctuations cause a short-term loss in currency value.
For example, in buying one lot of EUR/USD, the trader is buying one lot of Euros, and selling one lot of Dollars. By maintaining the position overnight, the trader pays interest on that currency which was sold, and he or she receives interest for the currency which was purchased.
So, in this example, if the interest received from the purchased Euros is greater than the interest paid for the sold Dollars, the trading account gains simply by holding the position.
The longer the winning position is held, the greater the possible interest income and the thicker the cushion against fluctuations in the market.
A forex carry trade creates an extra opportunity for profit as well as a layer of additional protection. And, the carry trade can also increase the potential longevity of a holding.
Part of the appeal of forex carry trading is the possibility of earning interest. Typically, income accrues daily for long carries with triple rollovers. Here’s the calculation to approximate daily yield:
[(Interest Rate of the Long Currency) – (Interest Rate of the Short Currency) / 365] x Notional value of the position
So, for example, for one lot of NZD/JPY with a notional value of 100,000 the interest can be calculated like this:
[(0.0333 – 0.0033)/365] x 100,000 = about $8 per day
This amount will be approximate, since banks use overnight rates which fluctuate daily. As well as yield for forex traders who are long NZD/JPY, traders whose strategies involve “fading” the carry, or else going short NZD/JPY can also earn interest.

Hedged Carry Trades

Yet another type of carry trade involves hedging one long carry trade with another short carry trade using different currency pairs that are closely correlated and which results in a net interest rate benefit to the overall position.
For example, a hedged carry trader might exploit interest rate differentials between well correlated currency pairs like the following:
  • EUR/USD and USD /CHF
  • AUD/USD and NZD/USD
  • GBP/USD and USD/CHF
  • EUR/JPY and CHF/JPY
  • GBP/JPY and CHF/JPY
Such hedged carry trades are often highly leveraged to make them worthwhile, thus much more risky. Nevertheless, the main risk to this hedged carry trade strategy arises if the correlation between the pairs breaks down for some reason and subsequently results in losses. Remember that the correlation risk is of course not the only risk factor to consider, just one of them.
Try Equidious Research’s services for Best Forex Signal tips, Comex Signal tips and Stock Signal tips of USA Market with the specialization in NASDAQ/NYSE stock exchanges.
Join 300,000+ traders who stay ahead of the market, submit your details with us by filling our CONTACT FORM.
Happy Trading!
Labels:

Comments

Post a Comment

Popular posts from this blog

Know More About- Commodity Currencies Trading

Currencies of countries that rely heavily on the export of  commodities  are often referred to as  commodity currencies . An important factor that any  forex trader  should consider is that the value of commodity currencies usually rise and fall in tandem with the value of the country's main commodity exports. What Are Commodity Currencies and Pair: Both the value of the  commodity  and the country's trade balance, with respect to the commodity, are significant factors in the valuation of commodity currencies. The most commonly traded commodity currencies are: Canada (CAD) New Zealand (NZD) Australia (AUD) The three  commodity pairs  are: USD/CAD AUD/USD NZD/USD These  pairs  are highly correlated to  commodity  fluctuations in the world markets and are the most heavily traded  commodity pairs  in  forex .  Forex  traders often trade these  commodity pairs  to gain expos...
Post a Comment
Read more

Do you have "FOMO Traders" Characters?

FOMO is Fear of Missing Out type of traders, which influences our daily trading habits and decision making capability in Forex Trading. There are following causes which leads FOMO Traders: High Expectations FOMO Traders thanks that one needs to double the account by next month and you are missing out if you do not make a lot of money as soon as possible. This leads to higher risk and large position sizes. One wrong trade and you will regret of choosing wrong position sizing and trade. Over Confidence When you come from a winning streak and feel invincible and then take random trades or too large positions because you think we can “feel” what the market is going to do. Lack of Confidence After a few losing trades, many traders will try to play catch up and then enter random trades just to get into the market and hopefully somehow generate a profit. No Rules When you do not have a system or rules, to begin with, then FOMO is your default mode, always jumping in a...
Post a Comment
Read more

Learn More About Trading Breakouts

Breakouts are a common phenomenon in the Forex market  and occur across different chart intervals. It is therefore no surprise that break out  trading strategies  have become one of the most popular ways of  trading Forex , besides other strategies such as trend following methods. What is Breakout in Forex? A  breakout  is a price movement of a security through an identified level of resistance, which is usually followed by heavy volume and an increased amount of volatility. Traders buy the underlying asset when the price breaks above a level of resistance or when it breaks below a level of support. A breakout is the point at which the  market price  breaks away, or moves out of a  trading range . The trading range can be for any length of time but once prices exceeds the high or low of the range, a breakout has occurred. The accepted market wisdom is “buy low sell high”. What is False Breakout in Forex? A  false breakout  ...
Post a Comment
Read more