What is a Carry Trade?

What is a Carry Trade?

What is a Carry Trade?

What is a Carry Trade?

Did you know that there is a trading system that can make a profit even if the price stays the same for a long period of time?

The truth is there, it is one of the most popular ways to earn money for many of the largest money managers in the financial universe.

What is a Carry Trade?

The carry trade is borrowing or selling financial instruments with low interest rates, which are then used to purchase financial instruments with a rate higher interest. While you are paying a low rate of interest in the financial instruments borrowed / sold, while collecting higher interest rates on financial instruments purchased. So your profit is the difference in interest rates, the interest rate differentials, ie ..

For example: Suppose you went to the bank and borrowed $ 10,000. Your rate for loans is 1% of $ 10,000 each year. With that borrowed money buying bonds for $ 10,000 to bring to 5% annually.

What is your salary? This is 4% per year! The difference between interest rates!

Surely this thinking that no bueo or profitable sounds like hunting '' swing '' on the market. "However, when applied to the currency market, with its higher bullion and payments daily interest, to sit and watch as your account grows every day can be fun.

Risks linked to trade.

Since you are a professional trader, you already know that the first question to ask yourself before entering the trade, right?

What is my contingency (risk)?

Before entering a trade, you should always consider your maximum risk and whether or not it is acceptable according to their risk management rules.

In the above case, Darko maximum risk was $ 9,000. Your position is automatically closed when the loss reached $ 9,000.

What is a Carry Trade?

Good? No it sounds great, right?

Remember that this is the worst possible scenario and Darko was a rookie, but has not been fully accepted standards set loss limits.

When you do carry trade, you can still limit the loss as well as "the 'normal' trade '. For example, if Darko decided he wanted to limit the risk of $ 1,000, you might set a stop loss (stop loss) at any price level of $ 1,000 loss. He will continue to receive interest while holding the position.

What are the criteria for the carry trade?

It is quite easy to find a suitable partner for the carry trade. Look for two things:

- Look for a differential high interest rates

- Finding a currency pair is in an uptrend - where the currency you are buying is growing against the currency you sell

Quite simple? Here is a sample carry trade:

This is a weekly chart of GBP / JPY. Until recently, the interest rate policy of the Japanese central bank had zero% (currently the interest rate of 0.30% at time of writing - 20/12/2009). Since the Bank of England maintained one of the highest interest rates among major currencies (currently at 0.50% at time of writing), many traders are hooked on this currency pair (one of the factors that create a small upward trend). From late 2000 to mid-2007, the pair has increased the price from 150.00 to 250.00 -. That is, 10,000 tap! If the interest rate differential interest adds two currencies, this pair is a good long-term business for many investors and operators, regardless of volatile currency movements in the market.

But, of course, economic and political factors are changing the world every day. In the last year, you could lose all 10,000 faucet so diligently collected all these seven years. Interest rates and interest rate differentials between currencies change, putting popular carry trade (such as the yen carry trade) please investor

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