Unique Edge (lesson17)

Carry Trade

Did you know there is a trading system that can make money if the price stayed exactly the same for long periods of time?
One the most popular ways of making money by many of the biggest and best money managers in the financial universe! It’s called the “Carry Trade“.
What is a Carry Trade? A carry trade involves borrowing or selling a financial instrument with a low-interest rate, then using it to purchase a financial instrument with a higher interest rate. While you are paying the low-interest rate on the financial instrument you borrowed/sold, you are collecting higher interest on the financial instrument you purchased.
Thus your profit is the money you collect from the interest rate differential.
For example: Let’s say you go to a bank and borrow $10,000.
Their lending fee is 1% of the $10,000 every year. With that borrowed money, you turn around and purchase a $10,000 bond that pays 5% a year. What’s your profit? Anyone? You got it! It’s 4% a year!
The difference between interest rates! By now you’re probably thinking, “That doesn’t sound as exciting or profitable as catching swings in the market.” However, when you apply it to the spot forex market, with its higher leverage and daily interest payments, sitting back and watching your account grow daily can get pretty sexy.
To give you an idea, a 3% interest rate differential becomes 60% annual interest a year on an account that is 20 times leveraged!

What is a Currency Carry Trade?
What makes the carry trade special in the spot forex market is that interest payments happen every trading day based on your position. Technically, all positions are closed at the end of the day in the spot forex market. You just don’t see it happen if you hold a position to the next day. Brokers close and reopen your position, and then they debit/credit you the overnight interest rate difference between the two currencies.

When Do Carry Trades Work?
Carry trades work best when investors feel risky and optimistic enough to buy high-yielding currencies and sell lower yielding currencies.
If the outlook for a country’s economy looks as good then chances are that that country’s central bank will have to raise interest rates in order to control inflation. This is good for carry trade because a higher interest rate means a bigger interest rate differential.
When properly applied, the carry trade can add significant income to your account, along with your directional trading strategies

Trader Alen