Carry Trade Strategy | Trading System
Carry Trade Strategy- is one of the fundamental most popular Forex trading strategies. It is used not only by ordinary traders but it is also used by large investment funds. The overriding principle of carry trade strategies is to buy the currency with high interest rate and sell at low interest rate. This arrangement offers the benefit not only of fluctuations in currency pairs, also offers the benefit of the difference in interest rates (daily interest). This strategy can be applied only with normal global conditions. Should never be used during the crisis. Do not forget to use the Forex broker that pays daily interest rate if you will not make the difference in currency rates.
Characteristics of Carry Trade Strategy
- Potential long-term benefit.
- Two sources of profit.
- It works only with the growing global economy.
How to Trade?
- Choose a pair of currencies at a fairly high difference in interest rates (AUD / JPY, NZD / JPY and GBP / JPYare good historical examples of such pairs).
- Go on a long long and short with the chosen pair, depending on the direction with the positive rate of interest of this pair.
- Choose moderate position size, so it would be able to maintain significant floating loss.
- Do not place the stop-loss (one of the few Forex trading strategies where the stop-loss is not recommended).
- I waited.
- When you feel you earn enough or expect some global financial turmoil, close the position.
The graph shows the growth of such long-term “carry trade” GBP / JPY from late 2000 to early 2007. The pound had an interest rate of around 5% during the period, while the yen had its rate near zero, the result of a daily rate of around 5%, which is then multiplied with leverage. With leverage of 1: 100 will be around 3,000% for the entire period. During the period GBP / JPY also rose by more than 9,300 pips. As you see, the profit potential is extraordinary.
The problem is that the uptrend was completed very quickly in 2007 and traders had little time to react and close positions. The carry trade is quite risky and you should be very careful when you are determined to use it.