What is a currency carry trade?
If you’re a trader on the forex market, what you’re essentially trying to do is extract more value through some other currency from the funds you’re willing to invest. This is what currency carry trade is all about – it is one of the most basic (and efficient) ways to increase your total funds just by changing the currency you’re using. In this article, our team of experts will guide you through some of the main principles of this type of trading and warn you of the potential traps which may appear along the way. Keep reading for more details.
What is a currency carry trade? | The Principles
Now then, as we have already said, currency carry trade is one of the best known Forex Trading Strategies. Here, you are looking to sell a currency with a low interest rate and swap it with a currency which yields more. The difference between these two rates is your profit which can often be very high. Currency carry trade is among the most lucrative moves a trader can execute, provided it is done properly and depending on the leverage you decide to use. That way your initial investment stays the same, but the rate at which it grows greatly increases. If the exchange rate between two currencies you want to use for this maneuver remains a constant, it is relatively easy to predict the favorable outcome of your trade.
What is a currency carry trade? | What to look out for?
However, that last sentence of the previous paragraph also mentions the greatest risk for those who decide to make a currency carry trade. You see, the exchange rate is often not a constant because a currency’s value can change dramatically, boosting or destroying your profits in the process. You will definitely want to know How are currency prices determined? before you proceed to make a currency carry trade. When the market is calm, this strategy seems very reasonable, but in a volatile market the value of your currency can drop far more than you were aiming to gain from interest rates, effectively causing you losses. This is why some experience and knowledge of the market are required before you can complete this kind of trade safely. Try to look at the big picture to figure out how your currency will behave in the upcoming period and then decide on your actions.
What is a currency carry trade? | Conclusion
Currency carry trade is a well known strategy on the forex market and a strategy that can bring substantial profits if you decide to use it. On the other hand, inexperienced traders can often get caught in some of its traps because they don’t take exchange rates into account or cannot predict correctly how their currency will behave on the market. This is why some experience is needed when performing such trades, so try to inform yourself as thoroughly as possible before you make a move like this. If you have done that, you just might strike it rich.