Carry trade is not forex-exclusive. If you’ve been exploring the world of investment, you probably have encountered carry trading in other realms, such as bonds. However, the carry strategy for forex requires some additional research. This article will help you determine if carry trade is right for you, and how to form a strategy that works.
What is Carry Trade
Typically, when we talk about forex trading, we focus on buying at the lowest point and selling at the peak price. That way, you profit from the pricing differences, which creates your profit margin. However, carry trade takes a slightly different approach.
In the Forex market, carry trade capitalizes on the difference in interest rates. This makes carry trade one of the most profitable forex trading methods, but also one of the riskiest ones — you could easily incur tens of thousands loss if you don’t know what you’re doing.
Interest Rate vs. Exchange Rate
As we mentioned earlier, carry trade focuses on the difference in interest rate. Specifically, you calculate the daily interest rate by comparing the differences between your long and short currency. You then time that number with your notional value (NV) and divide it by the year (365 days) and the currency pair quote.
However, many forget that the daily interest rate is not the only thing determining whether your carry trade is a success. In reality, currencies fluctuate all the time. And at some point, the unpredictable exchange rate might make a trade go from profiting to severely losing.
Choosing Your Currency Pair in 2021
Almost all central banks have bottomed out after 2020, leaving people wondering if there is any carry trade opportunities at all this year. The answer is yes. With several powerful currencies having historically low-interest rates, now is actually a good time to enter the carry trade game — so long you know what you’re doing.
The swap between US dollars and Swiss francs is by far the biggest, creating the perfect environment for carrying trade. Considering most banks have bottomed out, now is a good time to buy. The Swiss franc also has a negative interest rate currently, reinforcing the buying trend.
Instead of the conventional power-pair AUD/JPY, this year, we’re looking in a different direction with USD/JPY presenting a steady swap size for a $100 margin. In comparison, the AUD/JPY pair has lost its power due to the close interest rates of the two currencies.
If you’ve been holding onto your euros, now is a good chance to sell. Right now, EUR/USD continues to show a selling trend and a selling trade direction after the central bank hit 0% on Euros in April. 2019.
As popular as carry trade is, the risk associated is also significant. This guide only provides you the basics of creating a carry strategy for forex, but we recommend you to start with a demo account before getting deep into investing. Carry trade is a mid-to-long-term investment and requires ample knowledge of how the currency market changes. However, once you master the trade, you will realize why carrying is one of the most popular forex trading strategies for sure!