The Forex Carry Trade
Many seasoned investors on LTG GoldRock brokerage platform will tell you that one of the main benefits of forex trading is the carry trade. The carry trade allows you to buy one higher interest rate currency versus another lower interest rate currency. What this is in effect doing is allowing you to hold one currency that has a higher yielding rate and allowing you to sell the other that has a lower rate. This allows you to profit from the difference in interest rates even when the currency is trading sideways.
An example of this is, if the AUD Australian dollar is being bought while the EUR Euro is being sold, you are going short the EUR/AUD. This will allow you to gain a positive return on your trade based on the differential of 2%. This, however, is under the assumption that the Reserve Bank of Australia’s interest rate is at 2.50% while the European Central Bank rate is at .50%. With a large enough account and good leverage, you will be able to earn the compounded interest rate when the trade is held in excess of a day.
Always keep in mind that a carry trade can be either negative or positive. This means it can either work for you or against you. For example if one is selling the NZD New Zealand dollar in exchange for the USD United States Dollar and the trade is held for a day, you will see a -1.50% return. This is because the RBNZ Reserve Bank of New Zealand interest rate is 2.00%, and the Fed Federal Reserve is .50%. An example of this is seen when you take a short trade on one currency that yields higher versus another that yields lower.
When a carry trade is held in excess of 1 day what is taking place is that the broker closes the position and the end of the trading day and then reopens at the start of the new trading day. This is automatically done, so it’s not seen on the platform. The interest for the day of trading whether it is a positive or negative carry is added or subtracted for the trading account and will be reflected in the balance.
Keep in mind that the trend must always be in favor of your buy or sell a position as this points to the market sentiment. This means fundamental analysis will be an important role in the carry trade, and it focus on the long term trend of the market. Sold fundamentals mean a sold carry trade. The sentiment of the market should always favor the countenance of the trend which means the continued rallying of the currencies with higher yielding interest rates vs. the lower interest rate currencies.
This point to the fact that traders are more willing to take on the risk, when you follow the trend you will have positive returns on the carry trade, which adds to your wins along with a positive rate differential.
Finally, two things that you must remember is when you are trying to take advantage of the carry trade, you must first purchase higher yielding currencies this means you buy one currency that has a higher rate of interest and sell the other currency that has a lower yield or lower interest rate. Second you need to ensure that there is adequate appetite for risk this way you can gain from the actual trade along with a positive rate differential. LTG GoldRock Preferred Broker offer some of the best roll over rates on the market.