Tag: Carry trade

  • Currency Carry Trade – What is It and How to Profit from It?

    Currency Carry Trade – What is It and How to Profit from It?

    3 min read

    Currency Carry Trade - What is It and How to Profit from It?

    A currency carry trade is a popular technique among currency traders.

    It is when a trader borrows a currency at a low-interest rate to fund the purchase of another currency earning a higher interest rate.

    In the forex market, currencies are traded in pairs, as you already know. For example, when you buy USD/GBP you are actually buying the U.S. dollar and selling Great Britain pound at the same time.

    You pay interest on the currency you sell and collect interest on the currency you buy.

    In the forex market, interest payments occur every trading day based on your position.

    Actually, all positions are closed at the end of the day in the forex market. But you don’t see it happen if you hold a position to the next day.

    Brokers just close and reopen your position. Then they credit or debit you the overnight interest rate differential between the currencies.

    This is the cost of “carrying” a position to the next day.

    The amount of leverage makes the carry trade very popular.

    Most forex trading is margin based. That means you have to place a small amount of the position and your broker will place the rest. Majority of brokers requires as little as 1% or 2% of a position.  

    The currency carry trade is borrowing in the currency of a country with a low-interest rate and using the funds to invest in the currency of another country with a higher interest rate.

    And, of course, profiting from the difference.

    For example, the popular carry trade is borrowing funds in Japanese yen and investing it in U.S. dollars.

    How does currency carry trade work

    Currency markets offer investors access to an asset class that is highly liquid and has the potential for gaining risk-adjusted returns. It, also, can show some similarity to traditional investments in a diversified portfolio.

    The main goal in currency markets is to capture the gain of interest rate differentials between currencies, known as ‘the carry’.
    The short-term interest rates can vary significantly across countries because of their different policy objectives. The macroeconomic imbalances have the influence too.

    Currency Carry Trade - What is It and How to Profit from It? 1
    Countries with higher growth rates tend to have higher interest rates and stronger currencies.

    A so-called ‘positive carry’ trade is one in which an investor borrows money in countries where interest rates are low and invests in a country where interest rates are higher.

    This means that the investor sells (goes short) a position in low-interest rate currencies and buys (goes long) a higher interest rate currency.

    The difference in interest rates between the two countries, ‘the carry’, will, over a period of time, be offset by the change in the exchange rate between the two countries.

    However, exchange rates move in the expected direction, but not enough to offset the carry. This means that a positive return can be expected.

    The inefficiency of the markets offers investors the opportunity to gain from exchange rate movements in addition to benefiting from the carry.

    The profit or loss from a positive carry trade can be calculated:

    Profit from ‘the carry’ (interest rate differential) + Profit/loss from exchange rate movements

    In simple words, the traders pay a low-interest rate on the borrowed/sold currency, they simultaneously collect higher interest rates on the currency that they bought.

    The interest rate differential between the two currencies is profit.

    Currency carry trade gives traders a choice to “buy low and sell high”. Most forex “carry” trades involve currency pairs such as the NZD/JPY and AUD/JPY because of the high-interest rate spreads.

    Pros and cons of currency carry trade

    In addition to trading gains, currency carry trade gives you also interest earnings. Carry trading also lets you make use of leverage to trade assets you would not differently be able to yield.

    The daily interest paid on the currency carry trade is based on the leveraged amount. That can make for enormous profits from an inexpensive outlay.

    Currency Carry Trade - What is It and How to Profit from It? 2

    Still, currency carry trading brings significant risk. This comes due to the uncertainty in exchange rates.

    If a trader fails to hedge their position appropriately, high levels of leverage employed in carry trades could result in large losses. This means that even small movements in exchange rates may cause losses.

    So, we can say, currency carry trading is a good option for traders with a high-risk desire.

    The currency carry trade,  is potentially profitable, but gives a decent amount of risk.

    Why is this? This is because the best currencies for this kind of trading are some of the most volatile.

    Every single market sentiment among traders in the currency market can have a hard impact on “carry pair” currencies. Without sufficient risk management, a trader’s account can be wiped out by a cruel twist.

    The best time to enter carry trades is when fundamentals and market sentiment support them. At times of positive market sentiment when investors are in a buying mood.

    The bottom line

    Currency carry trade has the potential to be very profitable over the long term if precisely managed. It can be a constant stream of income. Also, it can mitigate you from the negative effects of exchange rate movements.

    In a currency carry trade, an investor potentially stands to profit or lose both from the relative movement of the exchange rate and the interest rate differential between the two currencies. Markets that present a high-interest rate differential often present higher currency volatility and an unexpected weakening of the target currency purchased could generate losses. To be profitable, the interest rate differential of a carry trade must be greater than the possible weakening of the target currency over the period of time that the trade is executed.

    Don’t waste your money.

     risk disclosure

  • Carry trade and how does it work?

    Carry trade and how does it work?

    What is carry trade and how does it work?
    How to capture the difference between the rates

    By Guy Avtalyon

    In this post, I’m gonna explain what is carry trade, how to trade this strategy, how to use it in Forex trading.

    Niels Bohr, the famous Danish physicist, once joked that “prediction is very difficult, especially about the future.” No words could better express the difficulties associated with exchange rate forecasting. As anyone involved in the business of currency forecasting can attest, it can be a humbling experience.

    ‘Having endeavored to forecast exchange rates for more than half a century, I have understandably developed significant humility about my ability in this area.’ said Alan Greenspan, former U.S. Federal Reserve chairman. Some may think writing about the fortunes of the stock market is tricky, but try to observe currencies. That’s the challenge.

    What is a carry trade strategy

    A carry trade is a trading strategy in which a trader borrows money at a low -interest rate to trade the asset that is possible to generate a higher return. This strategy is very popular in forex trading.
    This strategy counts on relative stability in asset prices. You know how an unfavorable exchange rate movement can easily wipe out the returns from the difference in the underlying interest rate.

    This motivates some people to describe the carry trade as similar to picking up pennies in front of a fast-moving car.

    What is the goal of the carry trade

    The goal of this strategy is to make a profit from the interest rate differential. Sometimes that difference can be large. So adding leverage can literally tremendously multiply profits.

    In currency trading, a carry trade is a strategy in which a low-yielding currency (one with a low-interest rate) is sold. And the funds raised are using to purchase a high-yielding currency. The purpose of this type of trade is to profit on the interest rate differential of the two currencies. In this strategy, traders use leverage to dramatically increase the profits earned through the carry trades.

    Up to 2007 many traders borrowed in Japanese yen or Swiss francs. They were actually taking advantage of very low-interest rates in Japan and Switzerland and used the borrowed money to take long positions in other currencies that were backed by high-interest rates. For example, the Australian and New Zealand dollars and South African Rand were that currencies.

    BTW, Japan has kept low-interest rates for quite a long time now. Australia and New Zealand have one of the highest interest rates in the developed world! In 2011 interest rates in Australia were as high as 4.5 percent!

    Economists theories

    Economists have developed a wide range of theories to explain how exchange rates are determined. Most studies conclude that for short- and medium-term horizons, up to perhaps a few years, a random walk characterizes exchange rate movements. But still better than most fundamentals-based exchange rate models. That studies find that models that work well in one period fail in others. They also find that models that work for one set of exchange rates fail to work for others.

    A strategy that has attracted a lot of interest among international investors is the so-called foreign exchange (FX) carry trade.

    FX carry trades entail going long a basket of high- yielding currencies and simultaneously going short a basket of low-yielding currencies. The empirical evidence suggests that the excess returns on this strategy have been fairly attractive.

    Yet, investors need to be mindful that carry trades are prone to crash when market conditions become volatile. Hence, investors need to overlay simple carry trade strategies with well- thought- out risk management systems to help protect against downside risks.

    How does a carry trade work in Forex?

    Let’s assume that you went long on AUDJPY and kept the position open overnight until the next day. Basically you are buying AUD and selling JPY.

    What happens the next day is that your forex broker will either debit or credit you the overnight interest rate differential between the two currencies. This rolling over of your current position is the carry trade.

    Say, if the interest rate earned on AUD is 4.00% and JPY is 0.10%. Your profit from the interest rate differential is 3.9% per year! This is considered a positive carry trade. But there is also s negative carry trade. It happens when you, for example, buy JPY and sell AUD. So, you could end up with a negative interest rate differential.

    This example is based on 1:1 leverage and assumes exchange rates remain constant for the whole year. Try to imagine applying leverage.

    In the example above, if you had the leverage of 100:1, your return would now be 100 x 3.9% = 390% on just the interest rate differential!

    When are carry trades successful?

    We are still on the example of  AUDJPY. If the central bank in Australia were to raise interest rates, then you would make even more gains. Therefore, you have to be mindful of the economic conditions in Australia. If the Reserve Bank of Australia is optimistic about the economy, then they will likely raise rates.

    But, if the economy is slow and the RBA believes it needs to lower rates to stimulate the economy, then the AUDJPY as a carry trade would not be that successful. Meanwhile, if the AUDJPY exchange rate moved higher, in addition to higher interest rates, your long position on the pair would gain even more!

    What is a Law of one price in a carry trading

    The principle of “uncovered interest rate parity” states that the exchange rate of any two currencies should adjust in a way to exclude any chance of making a profit from an interest rate differential.

    Furthermore, the Law of One Price states that the real carry cost of an asset should be the same in each country, meaning doesn’t matter from where you’re trading forex.

    Carry trades can be greatly tough. Because the FX element of a cross-currency carry trade requires selling the low-interest-rate currency. But also, buying the high-interest-rate currency. In the core of the carry is the intention to make the exchange rate of the low-interest-rate currency fall relative to the other. If carry trades are enough large in volume they can remove any trend for exchange rates to equalize. That is exactly what generates profits in the longer run.

    This directs us to believe that carry trades work best when risk aversion is low and investors are willing to invest in high yielding (risk) currencies.

    You might be interested to find Leading Stock Exchanges In The World

     

  • How to create your first trading strategy

    How to create your first trading strategy

    How to create your first trading strategy
    Find how to create your first trading strategy, what to look at and how it differs from investing strategy

    By Guy Avtalyon

    Okay, you want to create your first trading strategy and, to be honest, I understand your dilemma. You would like to be successful and you want to know, what strategy should you choose to nail it.

    Listen, there!

    What is the trading strategy?

    A trading strategy is a set of trading settings that serve the currency trader or stock to determine whether to buy or sell a currency or stock, where to enter and exit the position.  And how much capital they invest in trade, and in doing so, earn a difference in price.  

    The trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets.
    A broker can offer you the opportunity to enter into trades that are multiple times the value of the margin that you place. The market is fluid and you can open a trade or exit from one very quickly, so there is potential to make considerable returns.

    What is the investing strategy?

    The investment strategy is a set of rules, behaviors, or procedures, designed to guide an investor’s selection of an investment portfolio. People have different profit objectives, and their individual skills make different tactics and strategies appropriate.

    To complicated? Wait!!! There are more!

    A trading strategy can be – automated (various robots for trading, etc.) – manual (the vast majority of traders use their own trading system.)

    We would like to show you some of them which are successful. We will give you a brief description of 5 simple strategies that can help you to maximize your profits:

    Swing trading

    You can enter a successful swing trade by timing your trade. Do that when is a breakout after a consolidation.
    What does this mean? A period of consolidation occurs when a currency pair moves in an almost precisely defined price range. A breakout will occur. What really happens is that the values of the currencies “breakout” the resistance level. If you predict the breakout accurately, you’ll profit from that trade.

    A swing trade uses a channel trading strategy. Trades take place between the support and resistance levels of swing highs and swing lows.

     

    Rangebound trading

    Here you will need to identify a currency pair that trades within a certain range. Then, you have to identify the support and resistance levels and then time your trade by taking these movements into account.

    It is likely that there will not be a big difference between the upper and lower prices of the range. Because of this reason, you could trade in one of two ways.

    The first option is to trade within the range which will limit your profits as the price difference is bound to be minimal.

    The second way is to look for a breakout from the range. If this happens, you will have to react quickly. You can make a quick profit, but you can lose out. When you see a “false breakout” be extremely cautious because it may mean the market is moving against you so you’ll end up in losses.

    Position trading

    A position trade is not a short-term trade. It is based on macroeconomic trends. It could run over weeks or months or years. Traders take a long-term position based on an understanding of how inflation or the rate at which an economy is growing, will affect the value of a currency.

    If you want to adopt this strategy, you have to stay stick to two rules. First, do not use much leverage. A maximum of 10:1 is quite good in the forex trading. Secondly, the size should be relatively small. This is because you are thinking that some large movement in the relative price of the currency pair is possible.

    Carry trade

    A carry trade means to enter the trade that could take advantage of the interest rate differential of the two currencies.  That means you will be selling a currency with a low-interest rate and buying one that provides a greater rate of interest. Normally, you would choose a currency pair where the higher interest rate currency will appreciate to the lower interest rate currency.

    Carry trades can be high-risk. They are based on a combination of technical and fundamental analysis.

    Momentum trading

    Well, you have to know that the price constantly lies, but momentum tells the facts.
    At the simplest level, you can use momentum trading when rates are going up, then you should buy and when they are declining, you should sell and maximize your profits in the forex market.

    If you want to implement this strategy, you have to identify the currency pairs that show the greatest momentum and have moved most strongly. It is possible by tracking price movements over a period of several weeks.

    Then trade those pairs that show the greatest momentum.

    What do you need to be successful in trading?

    Let’s go back to the beginning and say a few words about how for every trader is important to use a reliable and robust trading platform. You will need an Expert Advisor (EA). It allows you to conduct backtesting of your trading strategy before you commit your funds. You will need one that functions effectively on your smartphone and your tablet as well, a versatile platform that works well under Windows, MacOS, and Linux.

    A system with 100% success does not exist so that you must not expect any of these systems to get your earnings each and every time. But, while following all the rules you can only end up in the plus!

    How to create the first trading strategy?

    New traders start to learn trading strategies from other traders. They are mirroring strategies from experienced traders. But, how do they get started with their trading strategy?

    Fun fact 1: Creating your first trading strategy is easy.
    Fun fact 2: Creating a profitable trading strategy is hard.

    Basically, you have to follow some basic steps while formulating your first trading strategy. Building your own can be fun, easy, and surprisingly quick.

    But, don’t expect your first trading strategy will make you rich.

    So, what you have to do?

    Recognize the real reason why you want to enter the market and have principles.

    Before you start creating your own trading strategy, you must have an idea of how the market works. Most importantly, you need to answer this question.

    How to make money from trading?

    To answer this question you have to read and learn about both technical and fundamental analysis. Avoid get-rich-quick offers.  Take care of demand and supply. Never have trust in theories that claim that people are perfectly rational.

    Your principles will define your every step in the market, so it is very important to stick with it. It will need your full attention. It is an urge to follow one principle in your first trading strategy. Never choose complicated solutions. The simpler, the better. Trade by the KISS rule (Keep It Simple Stupid).

    In the beginning, you don’t want to be astounded by a complex strategy. Besides, a trading strategy with more moving parts is harder to manage and improve.

    How to choose a market for first trading strategy?

    What do you want to trade: Forex, Options, Futures, Equities?

    If you want to trade forex, you have to understand what you are buying and selling with a currency quote. You have to learn about the different models of forex brokers.  You have to know how the margin is calculated. If you want to trade equities, you must know what a share means or the difference between a blue-chip and penny stock.

    There’s a lot to learn about each market but you can not start to learn until you choose your trading market. The rule of thumb is that you must understand the market you choose to trade.

    Define a trading frame

    Yeah, I know.

    It’s not easy to decide on a trading time frame. At first, you will not know if you like more quick scalping or daily swing trading.

    Maybe an idea to try intraday trading isn’t bad. You’ll be able to watch the market for long-term periods. But you have to know, when you trade fast time frames, you get fast feedback which shortens your learning period.

    If you are not able to watch the market for long-term periods, start with end-of-day charts. With some effort, you can learn enough to decide if swing trading is for you.

    What have you to define?

    Entry trigger. – It will help you enter the market without hesitation or demur. Both, bar and candlestick patterns are useful triggers. If you prefer indicators, oscillators like the RSI and stochastics are good solutions also.

    You have to plan your exit trigger. – The market can go against you, causing you limitless losses. Having a stop-loss option is crucial. You need to plan when to exit if things go wrong and also you need to plan when to exit if things do go your way. The market will not go in your favor always. That’s why you have to know when is the moment to take profits.

    Take care about the position size

    Set your risk limit. – Once you have your entry and exit rules sorted out, you can work on limiting risk. The basic way to do so is by position sizing. This means that for a certain trading setup, your position size determines how much money you are putting on the line. If you double your position size, and you will double your risk. You should be very careful about your position size.

    And it’s time to choose a tool to determine the trend. – You don’t trade when you see a Pin Bar (shortener for ‘Pinocchio Bar,’ a single candlestick set up that clues price action traders into potential reversals in the market). Trade only when the market is rising, and you should use a bullish Pin Bar to trigger your trade. You don’t trade when you see a Gimmee Bar (price action reversal candle formation). Trade only when you conclude that the market is going sideways, and you use a Gimmee Bar to enter the market.

    You have to decide on a tool to help you judge the market context, trending or not, up or down. For example, choose price action tools like swing pivots or trend lines. You can also use technical indicators like moving averages and MACD (Moving Average Convergence Divergence).

    Write down your first trading plan

    Write down your trading rules. – It is always good advice. Your trading strategy is still simple and you might be able to memorize the trading rules. But you must write down your trading rules. If you write down the trading plan you will get a robust and trustworthy method. Just in order to ensure discipline and consistency. It also gives you a record of your trading strategy. You will find it useful when you have to improve it.

    When you have written rules, you can backtest the strategy. – When you have a discretionary trading strategy, backtesting can be an arduous process. Discretionary trading is decision-based trading where the trader decides which trades to make based on current market conditions, and system trading is rule-based trading where the trading system decides which trades to make, regardless of current conditions. So, if you have a discretionary trading strategy you need to replay the market price action and record your trades manually.

    But if you have a mechanical trading strategy and a coding background, you can speed up this stage. Looking through the trades one by one is a fantastic way to develop your market instincts. This can also help you think of ways to improve your trading strategy.

    Should you be worried if the first trading strategy is not profitable?

    It’s okay. Your trading strategy is not fixed, it is a living thing. As your experience and knowledge grow, your trading strategy will improve. Try to avoid radical changes to your trading strategy.

    Your goal is to achieve a positive expectancy with every trade. Not positive profits for each trade. Statistics have to work for you.

    One thing is the most important when you create your first strategy and enter the market for the first time.

    Don’t be stubborn on the market. That could be the biggest mistake.

  • The Trading Strategies That Actually Work

    The Trading Strategies That Actually Work


    Seeking for the holy grail

    By Guy Avtalyon

    The trading strategies that actually work? How to choose? Where to find? Okay, I understand your dilemma. You would like to be successful and you want to know, what strategy should you choose to nail it.

    Listen here! First, let’s make clear what the Trading Strategy is

    A trading strategy is a set of trading settings that serve the currency trader to determine whether to buy or sell a currency, where to enter and exit the position, and how much capital they invest in trade, and in doing so, earn a difference in price.

    Question everything, it is a vital part of your trading.

    A forex broker can offer you the opportunity to enter into trades that are multiple times the value of the margin that you place.

    The market is fluid and you can open a trade or exit from one very quickly, so there is potential to make considerable returns.

    To complicated? Wait!!! There is more!

    Trading strategies can be – automated (various robots for trading, etc.) – manual (the vast majority of traders use their own trading system.)

    The trading strategies that actually work

    I would like to show you some of them which are successful. I will give you a brief description of 5 simple strategies that can help you to maximize your profits:

    1) Swing trading is one of the trading strategies that actually work

    You can have a profitable swing trade by timing your trade when there is a breakout after a period of consolidation.

    What does this mean? A period of consolidation is said to occur when a currency pair moves in a well-defined price range. A breakout will occur. The values of the currencies will “breakout” a resistance level. If you predict the breakout precisely, you can profit from your trade.

    A swing trade uses a channel trading strategy. Trades take place between the support and resistance levels of swing highs and swing lows.

    2) Rangebound trading 

    Here you will need to identify a currency pair that trades within a certain range. Then, you have to identify the support and resistance levels and then time your trade by taking these movements into account.

    It is likely that there will not be a big difference between the upper and lower prices of the range. Because of this reason, you could trade in one of two ways.

    The first option is to trade within the range which will limit your profits as the price difference is bound to be minimal.

    The second way is to look for a breakout from the range. If this happens, you will have to react quickly. You can make a quick profit, but you can lose out. A “false breakout” may cause the market to move in the opposite direction and lead to great losses.

    3) Position trading

    A position trade is not a short-term trade. It is based on macroeconomic trends. It could run over weeks or months or years. Traders take a long-term position based on an understanding of how inflation or the rate at which an economy is growing, will affect the value of a currency. If you want to adopt this strategy, you have to stay stick to two rules. First, do not use much leverage. A maximum of 10:1 is advisable. Secondly, the size should be relatively small. This is because you are taking a position with expecting a reasonably large movement in the relative price of the currency pair.

    4) Carry trade

    A carry trade means entering into a trade that will take advantage of the interest rate differential of the two currencies.  That means you will be selling a currency with a low-interest rate and buying one that provides a greater rate of interest.

    Normally, you would choose a currency pair where the higher interest rate currency will appreciate to the lower interest rate currency.

    Carry trades can be high-risk. They are based on a combination of technical and fundamental analysis.

    5) Momentum trading

    Fun fact: “The prices usually tell lies, but momentum usually speaks the truth.”

    At the simplest level, you can use momentum trading when rates are going up, then you should buy and when they are declining, you should sell and maximize your profits in the forex market. If you want to implement this strategy, you have to identify the currency pairs that show the greatest momentum and have moved most strongly. It is possible by tracking price movements over a period of several weeks. Then trade those pairs that show the greatest momentum.

    How to find the trading strategies that actually work?

    Let’s get back to the beginning and say few words about how important is for every trader to use a reliable and robust trading platform. You will need an Expert Advisor (EA). It allows you to conduct backtesting of your trading strategy before you commit your funds. You will need one that functions effectively on your smartphone and your tablet as well, a versatile platform that works well with Windows, Mac OS, and Linux.

    The trading strategies that actually work 100% don’t exist. A system with 100% success does not exist so that you do not expect any of this system to win your earnings every time.

    But with RRR (Required Rate Of Return) 1: 2 and following all the rules, you can only end up in the plus!

    Wish you luck!!!