The Forex
carry trade is the forex strategy that involves borrowing or selling a
low-interest financial product and using the proceeds to buy a high-yield
financial product. You therefore have to pay interest on the product that you
have borrowed or sold, but you get interest on the product with the higher
interest.
In stable
economic times the Carry Trade is very popular on the forex market. This has
everything to do with the high leverage and the daily interest payments
(so-called rollover rates, which are explained below) that are common in online
forex trading.
Why
especially in stable economic times? Because this Forex Strategy is doing
especially well when there is not much happening on the currency market.
Not all
forex brokers work with rollover rates. A good forex broker who does this and
therefore is very suitable for carrying out a Carry Trade is Markets.com
How does the forex currency Carry Trade work?
The forex
Carry Trade is borrowing or selling a currency / currency with a low interest
rate and subsequently investing in a currency / currency with a high interest
rate. So you sell the currency with the low interest rate (you pay interest on
that amount) and you buy the currency with the high interest rate (you receive
interest on that amount). The difference between high and low interest is
called the "positive carry".
All
currencies on the forex market are traded in pairs. Major currency pairs are
the EUR / USD, the GBP / USD and the USD / JPY. When you open a position where
you want to speculate on the rise of the Euro against the US Dollar, you buy
the EUR / USD.
That means
in reality that if you open a $ 10,000 miniature (1 pip = $ 1) you buy $ 10k in
Euros and at the same time sell $ 10k to US Dollars. If you're right and the
Euro is indeed rising against the dollar, you'll get more dollars back for your
Euros when you close the position.
The interesting thing about the Carry Trade on the Forex
Market is that every day interest is paid on the positions that you still have
at the end of the day. The forex broker closes and reopens the position and
then credits / debits the difference in overnight interest rate between the two
currencies of which the position consists. (the Euro and the Dollar in our
example above). These are the costs of "carrying" -carrying- from the
position to the next day. This is also called 'rolling over', and the interest
rate is the rollover rate.
For the sake of clarity: if you leave a position where
you sell a high-yield currency and buy a low-interest currency, you owe
interest. But visa versa you receive interest.
And now for the whole good, juicy, mouth-watering news,
the currant in the porridge, the pearl in the oyster, the pin in the haystack
and all those things: Because the currency market works with leverage, you can
score very high interest rates about the amount that you actually have to put
on the table ... .. (we wait until the quarter falls, think carefully, take
your time)
Example of a Carry Trade
Let's assume a Leverage of 100: 1. Many brokers offer
200: 1, even 400: 1, but realize that Leverage can also be a two-edged sword if
the position does not move in your direction.
A popular Carry Trade on the Forex is that in the
Japanese Yen. The Japanese Central Bank has held interest rates since the mid
nineties at very low rates, in order to stimulate exports. For example,
currency traders who currently use the Carry Trade strategy sell the Yen
interest rate 0.10% - and thus buy the Australian Dollar rate 3.75%. The
difference of 3.65% is the so-called positive carry.
Suppose you want to put $ 1000 in this Carry Trade, using
a Leverage of 100: 1. That means that with your $ 1000 you control a total of $
1000 x 100 = $ 100,000 in currency.
Suppose you hold this position for a year now. So you do
not buy this position to speculate, you want to get a return.
Three things can now happen:
1 The position loses value. The Yen rises and rises (but
the Japanese will not be happy with that either) and after a while he breaks
through your 100 pips limit - which is actually your stop / loss. The position
is automatically closed and you can say sayonara against your $ 1000 (possibly followed
by a ritual hari kiri)
2 Actually, quite a few years happens with the AUD / JPY.
He goes up a little, he goes down a bit, but at the end of the year he is more
or less where he started. With the position itself you have earned nothing, but
the $ 1000 has yielded 3.65% RENTE over $ 100,000, or 365% interest over the $
1000 you actually invested. Not bad!
3 The position wins value. The Japanese Central Bank has
once again jumped on the Yen to get it as far as possible in the soil and that
is pretty successful. Now you get the profit on your position on top of the
365% interest. Even better!
And this is with 'only' 100: 1 leverage, while in the
forex market it is not unusual to work with 200: 1 or more.
How do you spot a good Carry Trade?
There
are two things that matter:
1 Look
for a currency pair with a big difference in interest rate.
2 Look
for a currency pair that is in a clear trend in the direction you need for your
Carry Trade (so be beneficial for the high interest rate you buy)
See
below, for example, the weekly chart of the AUD / JPY, where the interest rate
difference is 3.65% in favor of the Australian Dollar. Since the beginning of
2009 there has been a clear uptrend of the Australian Dollar, ideal for a
positive Carry Trade with the Australian dollar as purchased currency.
Carry Trading summarized
The Carry Trade can be very profitable in online forex
trading. In a stable economic market, where relations are relatively clear and
a good, long-term trend can be spotted, the Carry Trade can deliver a high
return without a lot of difficulties or a lot of risk.
Of course, this forex strategy also has its own risk. If
you put your entire capital on a single Carry Trade and the trade goes the
wrong way, you can lose everything. Do not do so, it is not a government bond
(besides these days also not a basket where you have to put all your eggs)
Spot the interest rate difference - do not go for 1% or
2% difference, it is not worth it - spot the trend in the right direction, and
invest a small part of your capital in the trade. This may be a larger
proportion than you would normally end in a speculative day trade course. After
all, you are going for the long term, so you also need to give the position
some space.
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