Carry trade, a very popular basic foreign exchange trading strategy

Carry Trading Strategy - This is a very popular basic forex trading strategy. It is used not only by ordinary retail traders, but also by large hedge funds. The main principle of carry trading strategy is to buy high interest rate currencies and sell low interest rate currencies. This setup can not only profit from the fluctuation of currency pairs, but also profit from interest rate differentials (overnight interest). This strategy is only suitable for normal global economic environment. During the occurrence of economic crisis, it must not be used. Please note that if you want to profit from overnight interest, then your, forex brokerage should be one of the ones that pays real overnight interest. If your brokerage is a "overnight interest free", then you cannot profit from overnight interest.

feature

Long-term potential profits.

Two sources of profit.

Only applicable to a growing global economic environment.

How to trade?

Choose a currency pair with a high positive interest rate spread (AUD/JPY, NZD/JPY, and GBP/JPY are all examples of such pairs).

Go long or short depending on the direction of the positive overnight interest rate on the selected currency pair.

Select the appropriate number of positions in order to withstand significant paper losses.

Do not set a stop loss (a rare foreign exchange trading strategy, it is recommended not to set a stop loss).

Wait.

When you feel you are making enough or you expect global financial chaos, the position squaring.

example

TexampleThe chart depicts the growth of the long-term "carry trade" in GBP/JPY from late 2000 to mid-2007. During this period, the British pound maintained an interest rate of 5%, while the Japanese yen's interest rate was close to 0, resulting in an overnight interest rate of nearly 5%, which can be doubled with your leverage. If you use 1:100 leverage, the overnight interest rate is about 3,000% over the entire period. GBP/JPY also rose by more than 9,300 points during this period. As you can see, the potential profit is very substantial.

The problem is that the upward trend in 2007 was so fast that traders had little time to react and position squaring. Carry trades are very risky and should be used with caution.