Forex Carry Trading Strategy
As a busy person who doesn’t have much time to trade Forex but wants to achieve above average returns, Forex carry trading strategies may be the perfect fit for you.
A carry trade takes advantage of the interest rate differential of certain currency pairs, for example the AUD/JPY or NZD/JPY. If you are long the AUD/JPY for example, you are actually selling the Yen and buying the Aussie with leverage. For every lot of the AUD/JPY you hold, you pay the interest on the Yen (which currently stands at 0.1% at the time of writing) and receive the interest on the Aussie (which currently stands at 4.25% at the time of writing). If you purchase 1 lot of the AUD/JPY with 100:1 leverage, then your potential return is 415% a year!
Now that I’ve got your attention, you’re probably wondering why more people aren’t doing it if it’s that profitable. Well firstly, you should know that many of the world’s top money managers and hedge funds utilize the carry trade as a central part of their strategy. Secondly, while it seems fairly simple and straightforward, it’s anything but easy to execute well. There are risks involved in Forex carry trading strategies, just as there are in any other style of Forex trading. The good thing about this style of trading is that it’s fairly low maintenance, which is perfect for busy people who still want to gain an above average return on their investment.
The Risks Involved In Carry Trading
The risks involved in carry trading is can be illustrated by the following example. Let’s say that you have a $5,000 account and you wish to do a carry trade. You find a currency pair that has an interest rate differential of 4%, and you buy 1 lot of the pair on 100:1 leverage. You now have a potential return of $4,000 which is 80% of your $5,000 account from the interest alone. If you do absolutely nothing for the year, there are three potential scenarios that you face at the end of the year. First of all, the currency pair may drop drastically and bring the account into a margin call. If that happens, then you could potentially lose up to 80% of your account. It would take a fall of 400 pips to bring the account into a margin call. Considering that it’s very likely that a currency pair would experience a 400 pip drop in the span of a year, this is a significant risk. However, this risk can be mitigated with the correct risk management techniques and using less leverage in the account.
The Potential Returns Of Carry Trading
While there are risks involved in the execution of Forex carry trading strategies, there are significant rewards as well. In the above example, if the currency pair did nothing but move within 100-200 pips of your entry price, then you would be looking at a $4,000 gain at the end of the year from the interest alone. If the currency pair rises, it’s even better for you because you get to keep the profits and the interest as well. How good is that?
As a good Forex trader, you are probably concerned about the risks, and you should be. However, the example represents an extreme scenario where you are somewhat overleveraged and undercapitalized. If you were to use the same $5,000 account to purchase 0.25 lots on 100:1 leverage, then the price would have to move against you by 1900 pips in that same year to wipe you out, while you would still enjoy a very healthy 20% return on your capital.
The Final Word On Forex Carry Trading Strategies
The most important thing to keep in mind when you are executing Forex carry trading strategies is the importance of selecting the right currency pair and having the correct attitude towards risk. There are certainly good returns to be made using this strategy, as long as you are not too aggressive or greedy.
Live Forex Carry Trade Video Tutorial:
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