Carry trade is a trading strategy, which has brought in positive margins since the 1980s, but it became popular among retail traders in the first decade of the twentieth century. Nonetheless, in 2008, when the financial crisis struck the markets, investors experienced how risky this strategy could be. Anyway, the good memories of the high returns left many forex traders waiting for the profits to come back. Carry trade is a strategy that can be used by both short-term and long-term traders and this article describes the basics of it.
This strategy can be explained with a simple catchphrase: “buy low, sell high”. For forex trading, it implies buying a high yielding currency and financing it with a low yielding currency. The most run-after currency pairs, also offered by all trading platforms, are Australian dollar/Japanese Yen and New Zealand dollar/Japanese Yen since high interest rate spreads of each currency. Of course, there are more currencies that can be bought on trading platforms, but the pairs named above are the most liquid ones. When it comes to the liquidation of an exotic position, one must remember that it takes time and this delay may reduce profits or even end up in losses. Interest rates are to be found on central banks’ websites and if you are involved in forex trading, you must check them frequently to always stay on the top. Holding only one currency pair is very risky. Potential losses may overcome the expected profits, so the best solution is to hold a basket of currency pairs. Having three highest yielding currencies financed by three lowest yielding ones makes fx trading safer even in a case of a liquidation of the position. Online forex trading makes carry trade easier and more accessible for a retail trader since he or she can monitor interest rates, open or close positions and use a forex ea in one place.