Forex carry trade strategy

Forex carry trade strategy

As the carry trade in forex you beichnet the strategy is to borrow in currencies with low interest rates and to invest the money in a currency with higher interest. Luckily, no one has to take credit for the foreign bank, but it is enough to sell the currency with the lower interest rate and one with the higher interest rate to buy. When carry traders trying to profit primarily from interest rate differentials. An example of the carry trade is the pair NZDJPY. Japan in order to get a loan, you pay only 0.1 percent interest per year. In New Zealand, you get about 5 percent interest, when one invests his capital in the money market. The result is therefore a difference of 5-01 = 4.9% interest rate spread, if we buy the NZD and sell yen.


A Breakdown of the Forex Carry Trade The currency carry trade is a strategy in which a trader sells a currency that is offering lower interest rates The general formula is: P (position size) * (interest rate of the currency of one currency 2)

That does not sound much, but you have to remember that playing in the forex leverage effect a major role. If we trade with a leverage of 10:1, which is not uncommon for a year we would achieve a yield of 49% without change both currencies only.

The carry trade is one of the most popular strategies in forex trading because it guarantees some type return on medium or long term positions. But here we are already on the risks of carry trades. The exchange rate risk and interest rate risk. Fall of the exchange rate of the NZD over the year, we would obtain in the high leverage enormous losses. The carry trade will only work if the currency rises with the higher interest rate on the price. The second risk is the interest rate risk. Interest rates are not fixed but can be lowered or raised by central banks without notice. If the interest of the New Zealand dollar now, so for example, fell 1 percent, not only the expected interest income would be smaller. It could also lead to a crash of the currency because of the NZD is less attractive interest rates and are often associated with recessions.

And this is what we have experienced in recent months. Almost all industrialized countries have lowered their interest rates. The USD interest rate (prime rate) is 0 to 0.25 percent, the key rate at 2 percent of the European Central Bank and the Bank of England interest rate at 1.5 percent.

Here are five basic strategies that you can implement in order to forex carry trade successfully: Finally, a warning. Carry trade pairs tend to trend. The NDJPY has increased dramatically from 2000-2007, but has now almost back to its old lows reached. Carry trade pairs fall faster than anything else in Forex. They are just a two way street and should be treated with caution.