Forex Carry Trade

Posted by admin 11/08/2013 Comments are off 1332 views

Introduction

Forex Carry Trade means taking advantage of interest rate difference between two currencies to trade a currency pair. Investors take benefit of the interest rate differential between two currencies by going long/buying the high interest rate currency and going short/selling the preferential currency. Carry Trade is a very exciting and a recommended trading technique in the Forex market. It’s reputation arises from the fact that it assures investors profits by using its method as long-term investment strategies. The Carry Trade can also make benefit even if prices in the marketplace remains the same for long periods or time.

What to Look For in a Carry Trade?

  • Large interest rate differentials
  • Low Market Volatility
  • Healthy Economy

Advantages

The forex carry trade has attracted many investors from a wide variety of investment potentional. Before the development of technology that allowed the forex carry trading to become the popular form, the foreign exchange trading was restricted to large investors only. Here are some benefits of Forex Carry Trade:

  • Associated with the large size of the market and its continuous trading, liquidity is one of the most important features of the forex carry trade. Liquidity is the ability to convert an asset into cash quickly and without changes in price. In the forex carry trade there are always buyers and sellers available to swap currencies among themselves.
  • The carry trade investment technique allows investors to have large financial leverage ratios. Leverage is the ability to transact more money than one actually has, i.e; the investment will affect the capital of the broker more than the trader.

Risks and Disadvantages

Even Carry Trade can generate high returns but on the other hand it can be risky too. Here are some risks and disadvantages of Carry Trade:

  • Unlike the stock market, which allows you to create wealth for all its investors, since firms produce profits, the forex market is always a gain for an investor and a symmetrical loss of another. In other words, is a zero-sum game, where gains of one is equal to what the other loses.
  • Investors can reduce on the carry trade if the price goes against them. The yield in many situations can then not protect the overall reduce in the price move. Hence, You need to make sure that you comprehend the carry trading process before you begin using it, otherwise you may end up with dropping significant amounts of cash and investments.


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