The carry trade policy is applicable in most economic markets, whether it is a short-term trading activity or a long-term investment in an economic mechanism. The carry trade policy implies taking over money from an asset with the lowest profit rate, which is usually a pair of money, in order to finance the acquisition of an asset with the highest profit rate.
Despite the fact that carry trade is used in different bazaars, in this post I will analyze, first of all, in general, carry trade in Forex trading, since profit rates regularly fluctuate in both key and side money doubles.
What Is a Carry Trade?
“Carry trade” is a trading strategy involving borrowing funds at a low interest rate and investing in an asset that provides higher returns. As a rule, carry trade is based on borrowing funds in a currency with a low interest rate and converting borrowed funds into another currency. As a rule, the funds received are invested in the second currency if it offers a higher interest rate. The proceeds can also be channeled into assets such as stocks, commodities, bonds or real estate denominated in a second currency.
- The risk of a sharp decline in the prices of invested assets
- Implicit currency risk when the financing currency differs from the borrower’s national currency
Which investment strategies use Carry Trading?
Curry trading can be a high-risk strategy, for this reason it will require knowledgeable risk management in order to minimize the chance of high costs. Other investment strategies, including massive macro funds as well as other hedge funds, apply carry trading and also have all chances to combine it together with positions, allowing in addition to apply a push in the movement of money directions. In addition to other investments, other investment strategies also have a chance to apply carry trade procedures. The managers perform extensive studies and also basic research, formulating beliefs in the politicians of the main banks, macroeconomic conditions in single countries and also in the masses. It is important to choose a qualified manager, especially in the case of complex investment strategies. Although carry trading is often used in cash bazaars, this way of trading is also used in commodity bazaars, bazaars with fixed profitability and promotional bazaars.
How Currency Carry Trading Works
If we talk about money trading, a carry trade is an operation in which a trader acquires 1 currency unit (for example, the United States dollar) and uses it to acquire another currency unit (for example, the Japanese yen). In such a case, while the trader pays a low profit rate according to the borrowed/sold currency unit, someone at the same time acquires the most significant profit rate according to the acquired currency unit. The difference in profitable rates among 2 monetary units is also income. The trading activity of a currency unit gives money traders an alternative “acquisition according to a low and also realization according to a significant rate”, that it is difficult to make on an everyday basis. Mainly in Forex curry trading, similar fiat currencies such as NZD/JPY and AUD/JPY will take part because of the large profitable spreads.
Carry trade example
For example, let’s assume that an investor has decided to deposit 1,000 pounds to a Forex trading account. He chooses a positive carry trade deal for trading AUD/JPY, which has a difference in interest rates of 5%. Using a leverage of 20:1 (based on our margin rate on this instrument), he can open a position of £20,000 for this currency pair, that is, the deposit is only 5% of the total value.
Depending on which way the market is moving, this carry trade strategy can lead to different results:
- If the currency pair becomes more expensive for a certain time, then he will continue to receive 5% of the full value of the position and any other profit associated with it.
- If the currency pair depreciates for a certain time, this leads to losses, and the investor can exit the position when only a 5% margin of 20,000 pounds remains.
- If the exchange rate of the currency pair remains unchanged for a certain period of time, then the investor receives 5% interest on the transaction with leverage. He will not incur any other profits or losses.
There is always an opportunity to first work out your carry trade strategy on a Forex demo account. Virtual funds in the amount of 10,000 pounds are provided on the demo account so that you can trade on our platform without risk.
Risk Management in Carry Trading
Certainly, trading in monetary units, despite the possible profitability, is associated with a specific risk. This is associated with the fact that more optimal for the purpose of this type of trading monetary units, as well as the principle, are considered one of the most volatile. Negative bazaar locations of traders have all chances to rapidly and also very much affect the currencies of the “vaporization of the transfer”. In the absence of appropriate risk management, the result of the trader is able to be reduced in the absence of a sudden and also sudden turn. It is preferable to enter into transactions together with the transfer of a currency unit in general at the time if the fundamental characteristics as well as locations in the trade hold them. It is preferable to sign them in general in the stages of positive trading conditions, if traders are determined to buy.
Carry Trade news
The stability (or instability) of the economy can have a significant impact on carry trade rates, especially in the Forex market. This is due to the fact that interest rates depend on inflation and other external factors that can lead to frequent fluctuations in the value of currencies. To keep up to date with the latest trading news and economic reports, our news and analytical section of the platform is updated daily by our dedicated market analysts.