By: Miss Rebekah Manning
The carry trade is one of the most popular strategies in forex trading because it guarantees some type return on medium or long term positions. Unlike most strategies for the forex market, carry trading does not seek to capture a profit by exploiting changes in the value of a currency pair, but instead focuses on the interest rate differentials in currency pairs. The ideal carry trade is one where the currency pair experiences little change in value but has a wide interest rate differential.
What to Look For in a Carry Trade
1. Large interest rate differentials:
For example, the British Pound has a 4.50% interest rate and the Japanese Yen has a 0.50% interest rate. That is an interest rate differential of 4%. This means if you borrow Japanese Yen at 0.50% interest rate and invest it in the British Pound at a 4.50% interest rate, you will make 4% in interest on those borrowed funds.
2. Healthy Economy of the Higher Interest Rate Currency
In general, a country with a high interest rate should attract more foreign capital as investors seek the highest returns on their investments. The health of the economy should also be taken into consideration. For England, inflation above normal at 3% indicates interest rates may rise in the near future, which is typically good for the British Pound. High inflation isn’t always good, especially in the case of Zimbabwe. The interest rate in Zimbabwe as of October 2008 is 8500.00%. A carry traders deam? Absolutely not, with inflation topping 231,150,888.87% year over year in October, investing in this currency would be a very risky move.
Popular Carry Trade Set-Ups
Because Japanese interest rates have been so low in the recent past, a disproportionate number of carry trades in the forex market have involved the yen. So, let's use the GBP/JPY for a basic example. Let's say you know for a fact that the yen and the British Pound are going to maintain a parity over the coming year with 0.5% interest for the JPY and 4.5% interest for the British Pound. Taking $10,000 and leveraging it 10:1 to buy100,000 units GBP/JPY you will earn roughly with 11GBP per day on that investment, or 4000GBP per year. With the GBP/USD at an average price of 1.75, you would make roughly $7000 on your investment of $70,000 without a single pip move in your favor. In an ideal situation, like the chart below, investor capital will also flow in the direction of the higher yielding currency and the trader will profit on that as well, but that is not the main goal of the carry trade.
Carry Trade Dangers
Of course, the main danger with carry trading is the same with other types of longer-term forex strategies – the currency you are holding might depreciate against your home currency as is occurring in the chart below. If you suspect that this is going to happen, it is time for you to get out. Many carry traders will set their stops on long term carry trades at their trades entry point. This locks in carry profits and stops the trade before it takes position losses. Keep in mind that carry trading is a long term strategy and should be treated as such, so don’t stress out on intraday profits and losses.
Choosing the Best Desktop Currency Trader
By Cedric Welsch
Entering into the foreign currency trading game can be made much easier with the use of a desktop currency trader. These days, the market is becoming tougher and competition is reaching an all-time high. You need to keep up with changes and be able to scan the market at the most opportune times. This is where the help of a desktop currency trader can be regarded as highly valuable. You can always look for the best opportunities when you use this platform.
So how does a desktop currency trader function? Well, it is actually a specialized program which you can attach onto your desktop computer and help in running your forex business. Once you have attached the currency trader, you can eventually let your business run on autopilot especially if you have to attend to other responsibilities. It's pretty hard to run a forex business alone and manually especially if you trade online but with the help of this kind of system, it all becomes much easier to do.
Here are some important things you need to consider when choosing your currency trader:
Developer - You need to do some background check on the trader's developer. This gives you an idea on the program's credibility. Most of the programs like these are available online and developers are more than happy to give you an idea about them. Check out the mini-bios included in the product information and try to make some quick research about the proprietors. With the internet at your hands, a few clicks is all it takes to discover the most information you needed to know.
Compatibility - The ease of running your currency trader on your desktop greatly depends on technical requirements. Make sure you read this clause first before you purchase anything. It's easy to consider products with their descriptions alone, but the often bulleted list of requirements are equally important as well. Make sure that your personal computer or your laptop can actually handle running the trader system so you can also minimize glitches once you start using the system for buying and selling.
Price - Of course you also have to set a specific budget before you go off purchasing a currency trader system. There are some systems which are available for free, but only for a limited time. If this is your first time to use such a system or if you are also a newbie to the whole currency trading game, you may want to consider these free trial versions first. At least it will give you some ample time to evaluate if this is indeed a good investment for you to take.
Support Services - You also need to check up on the desktop currency trader's support services. Make sure they can provide you with the much needed assistance anytime and anywhere you are. This is crucial especially during the first few days and weeks that you may be running the system. You need to have a timely support service especially if glitches happen right in the middle of trading with your networks.
