In the Forex market, there is a common method of trading known as the
carry trade which is made in relation to fundamental analysis. It should
be a common term once a trader has studied their fundamentals and
learned how to apply the knowledge they have gained. Still, many traders
do not understand what a carry trade is or how to use it because they
may have only focused on technical analysis rather than fundamental
analysis.
Before a Forex trader decides whether they can make a carry trade, they
must first evaluate different currencies and the economic conditions in
their associated countries. This is the basics of fundamentals and
interest rates are probably the most important of these basics.
In a carry trade, Forex traders try to get a better idea of the true
value of a currency through various news reports, political events and
economic statistics. Then the carry trade can be used as a good strategy
based on the interest rates in a particular set of currencies.
The basic idea is that, when a trader decides to sell a currency with
lower interest rates, they can also purchase a currency that’s offering
higher interest rates. They sell the low rate and they buy the high
rate. This is also similar to what is known as “hedging” and comes from
the gambling term “hedging your bets.” By taking two trades in opposite
directions, a Forex trader uses the strategy of capturing the
difference of two different rates.
A real example of this has commonly been known as the “Yen carry trade.”
When Japan began decreasing their interest rates in 1999, they
eventually got to where they were almost at zero. This was essentially a
great loan to get in on and investors would take the money they got
from their easy loan and use it to buy something else later on.
To make the idea simple, just suppose that the interest rate for loan in
US was 2%. Then imagine that the same loan in another country was 5%.
You could take advantage of the difference in these two rates of
interest by taking out a loan with the 2% interest rate in the US and
simply exchanging the money into Australian dollars. Then, if there was
no fluctuation in the market, the trade would earn you a profit of 3%.
You never used any money of your own to begin with and you ended up
keeping 3% of the original loan you got! This is called a carry trade.
You literally carry your loan from one place to another and the trade
you make results in a profit.
Of course, you wouldn’t want to get “carried” away! These kind of trades
still have a risk involved. Exchange rates can fluctuate while you are
moving your money from one place to another. For example, the country
with the 5% interest rate could suddenly see a weakening of its currency
due to political turmoil or a sudden announcement from their central
bank.
Investors are often very careful with carry trades so as to research the
market beforehand and make sure there are no major news events coming
out that day or week. Then they go ahead and hedge their bets as they
trade the loan from one currency into another. Make sure and understand
the risks in Forex trading before you get involved with high leverage
trading. Then you will find the carry trade to be a very promising way
to make a quick profit!
No comments:
Post a Comment