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Trade
The Carry Trade strategy for a living on the strength of the currency
Probably, any investor who conducts certain transactions with their capital, or a regular trader, heard of the existence of the strategy Carry Trade. This trading approach began actively promoting since the ' 80s of the last century, but still does not lose its relevance.
If You are not familiar with this topic, in this article we will discuss the aspects of this approach and its application in trading.
What is a Carry trade
Speaking in plain language, this system provides for the purchase of foreign currency, high income, and the timely sale of foreign currency with low potential income. The basis of the Carry Trade approach are the following assets:
• British pound/Swiss franc (GBP/CHF).
• New Zealand dollar/Japanese yen (NZD/USD).
• Australian dollar/Japanese yen (AUD/JPY).
Assets for Carry Trade
Asset selection is due to the fact that interest rates in these countries vary considerably. In fact, to carry out the operation, the Carry Trade must correctly choose a currency pair where the currency of one country will be profitable (in high rate country), the currency of another country in relation to it will be low-yielding (low interest rate).
To clearly choose one or another currency pair, you need to study the official websites of major Central Banks, which always contains data on current interest rates in the country. Let's go back for a second for 2008. At that time the highest rate was in Australia and lowest in Japan.
Currency for trading the Carry Trade
Incredibly low value of the Japanese yen forced investors to make active operations Carry trade. They began to be active in the stock markets of America and China, that in itself greatly increased the number of speculative transactions.
Briefly about the income
This approach is a long-term, that is, the investor hopes to obtain a certain percentage of profit is not in the near future. If we talk about the approximate daily income, it can be calculated by the following formula:
(the rate of the purchased currency sold currency rate) * the volume of transactions/number of days.
Suppose, for example, take the currency pair NZDJPY. As of 2008 NZD interest rate was 8.2%, and the JPY is 0.5%. Accordingly, if we take 1 standard lot volume size position of 100,000, we get the following result: (0.8 — 0.005) x 100000 / 365. Together daily income of the investor will be about $ 20.
Carry Trade for trading currencies
the Reason for the popularity of the Carry Trade
The popularity of this strategy directly depends on the potential profitability of such operations. If you take into account the period 2000-2007 years, the average annual return on this asset would have amounted to about 5%, which is a very decent result.
We all know that in Forex market trader available leverage, respectively, the potential profitability of the presented approach in this market can handle and 100% per annum. An important feature is the fact that the investor will continue to earn even when the currency pair will not long be observed directional movement.
At first glance, this approach is incredibly simple, but actually, not all so rosy. "Not all yogurts are equally useful", says the proverb, accordingly, in the context of our question to the investor it is important to understand when the Carry Trade will actually work themselves to cheer, and when you may have a serious error.
Recommend these reviews of two high-quality shopping methods:
• The Method Jarroo
• Three screen elder
works When the technique of Carry trade
You first need to understand the interest rates. It is the main controller, by which the Central Bank affects the economy of the country. Given this point, all investors and traders are closely watching any changes in the context of this question.
After the appearance of any information investors are shifting their assets in a more expensive currency, thereby forming a stir, which further increases the current value of the instrument. And it is very important to conduct operational actions, that is, access to certain positions directly in the beginning of the cycle.
The most important aspect is the size of the investor's capital. It is clear that the largest income for this system will be to receive investment funds, large private investors and other major players. With regard to the participants with a small market capitalization, this strategy will not bring anything.
Carry trade starts to fail when the countries that until recently provided large stakes, begin cutting them down. Changes in interest rates directly affect the value of the currency, changing market trend tool. In such circumstances, investors immediately begin to reallocate their assets toward more profitable tool.
Such actions cause a decrease in demand and, consequently, reducing the cost of the current currency. Rapid currency depreciation can negate the entire profit from the difference in rates. Given all the above, we can conclude that the sharp change in interest rates is the main and most important problem of strategy Carry Trade.
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| Category: Forex | Added by: (30.10.2017)
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| Views: 260
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