Know Carry Trading
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 one of the fundamental trading strategies employed by professional forex traders. Leveraged carry trading is one of the favorite strategies employed by hedge fund and investment banks. You as a forex trader can also benefit from carry trading.
What is a carry trade? In nutshell, carry trading means taking advantage of interest rate difference between two currencies in a currency pair. Investors take benefit of the interest rate differential between two currencies by going long/buying the high interest rate currency and going short/selling the low interest rate currency.
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 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.
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. - 23218
Carry trading is one of the fundamental trading strategies employed by professional forex traders. Leveraged carry trading is one of the favorite strategies employed by hedge fund and investment banks. You as a forex trader can also benefit from carry trading.
What is a carry trade? In nutshell, carry trading means taking advantage of interest rate difference between two currencies in a currency pair. Investors take benefit of the interest rate differential between two currencies by going long/buying the high interest rate currency and going short/selling the low interest rate currency.
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 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.
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. - 23218
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 @ 4:56 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home