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The carry trade, which involves going long a high-yielding currency against a low-yielding one is very popular among long term currency traders. Nowadays, carry traders love the yen crosses due to the very low JPY interest rate, for example, the GBP/JPY or NZD/JPY cross currency pairs. Carry trades are typically held for several month or even years. Currently, when holding a long position in the GPB/JPY pair, forex brokers will pay out over $23 a day per 100,000 units in interest.
Now, when you think about building a carry trade, you should not think in the same terms as you normally think when you trade forex. You have to use much lower leverage, and you have to become a lot more conservative since you are planning to keep the trade for a longer time period. A carry trade can be an amazing opportunity to generate very good passive income ...similar to a real estate investment.
Daily rollover interest debit/credit Formula
Number of lots (Units) x (base currency interest rate - quote currency interest rate) / 365 days per year x current base currency rate = daily rollover interest debit/credit
GBP/JPY Carry Trade Example
Because UK has 5.25% rate, and Japan has 0.25% rate, this cross is very attractive for carry traders looking for buy opportunities only since they want to earn daily interest on the open position. Preferred timeframe's to make trading decisions are daily and weekly charts because they are looking to keep the trade for a longer time period. It really makes no sense to study a 5 min chart to take a carry trade.
A very simple strategy is the moving average cross over, looking to the above example, we only go long when the 5EMA crosses the 200SMA from below (up trend) but we do not take trades when the 5EMA crosses the 200SMA from above (down trend) because the carry trade strategy would focus only on interest-positive trades: in the case of the GBP/JPY, long trades.
When you are long GBP/JPY, most forex brokers will pay out over $23 a day per 100,000 units in interest which is paid on a daily basis. If for example, you keep the trade for 200 days, this would bring an amazing $4600* interest credited to your account not including the pips you lose or gain.
* The above calculation is an example only and is to be used for educational and informative purposes only since the amount actually debited or credited to your account will vary depending on the forex broker. Most brokers display the daily rollover interest fees on their online trading platform.
Carry Trade Strategy
- Identify a pair like GPB/JPY with a high interest differential
- Apply Technical Analysis and create a rule-based trading strategy using longer term timeframe's only
- Only long the currency bearing the higher interest rate: in the case of the GBP/JPY, long trades
- Keep an eye on the interest rate differential because it can vary over time
Another strategy is to open inversely correlated positions that are both interest-positive. This way, any losses in one currency's price would be (roughly) offset by gains in the other, while both earned interest. This is the idea behind a balanced basket of interest-earning currencies.
Interesting Carry Trade Pairs
All pairs that include the Yen due to the very low JPY interest rate.(date 02/15/2013) |
