Forex trading is now becoming very popular because of high profit giving feature. It is evident that there are lots of strategies used in forex trading but with the help of carry trade forex one can get maximum profit.
What is carry trade forex?
It is nothing but a very effective trading strategy used by the professional traders in order to maximize their profit share. In this strategy the trader usually borrows currency having low-interest rate and then use that fund to buy different currency which is having a high-interest rate.
Through this strategy, the trader not only aims to earn the interest rate differential between two currencies but also look for the currency they have purchased. The best thing about this strategy is that it helps the trader to make a profit even when the market is stable.
Let’s consider an example:
Suppose a trader visit a bank and lends $10,000. The lending fee is 1% of $10,000 every year.
Now the trader buys $10,000 bond which pays 5% per year with the borrowed money. Can you guess the profit of the trader?
The profit is 4% per year; this is the difference between interest rates.
Currencies suitable for carry trade forex
It is important to note that one must consider the fact that high differential ratios are the most crucial thing to look when looking for fitting a currency pair. It is said that NZD/USA, EUR/JPY, AUD/USA and AUD/JPY are the most suitable pair of currencies for carry trade forex strategy.
Golden rules for making carry trade in forex
Primarily there are 3 golden rules for doing carry trading in forex, and they are:
- Management of money
This is the most important and vital thing to be followed while using the strategy of carry trading in forex market. There are certain things which are to be followed in this particular field, and they are:
- One must only trade with the money which he/she can afford to lose while trading
- The trader must always invest a very little portion of capital for any specific given trade.
- Trade must be consistent
A Consistent level is highly important for carry trading in forex as this trading strategy involves holding of long and short positions in a given number of currencies. In maximum occasion (absent space, also wrong word usage: most occasions) , the trader will make little money each day and in some occasion the trader will also lose money but in less.
- The trader must invest in developing their skills and knowledge
This factor is equally important as the others. In carry forex trading the trader should hold position in two different pair of currencies that too for a decent amount of time. In addition to the invariable market factors like interest rates, economic announcements, stock markets, etc., this will influence the currencies in either of the nations.
It is important to mention that carry trade forex is very important, and it is also a different trading strategy compared to other strategies like scalping, trend trading, forex robots, etc. So it is crucial that it must be applied with special approach.