How to make money on carry trading
Positions on the currency market are settled or rolled over at 5:00 pm New York time. At this hour interest rates are calculated for all open positions. Holders of currency pairs where the short term interest rates in the countries of the currencies differ will have the annualized interest differential credited or debited their trading accounts.
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
Obviously it is more attractive to receive a premium than having to pay one and that is why under normal market conditions high yield currencies tend to appreciate (rise) in value against low yield currencies.
Example;
You do not believe that the interest rates in Japan and Europe will change in the near future so you decide to buy Euros against Japanese Yen. Another way to look at this transaction would be that you borrow Yen in order to buy Euros.
Let’s say that you buy 1.0 lot (one lot is equal to $ 100 000 in currency). On this position you would earn around $15 each day you keep the position open.
The keys to make money on carry trading
- Pick an exchange rate that stays unchanged or even better – rises. You may see this as a draw-win bet where your high yield currency is your winning home team.
- Levering up!
It is the second key that unlocks the potential of the currency market. Thanks to its extreme liquidity any position can be closed almost at any rate and time. Because of the very small risk that a position can not be automatically closed if the rate drops or rises within a certain margin forex brokerages can offer margin accounts where you investment can be leveraged up to 400 times.
Now, if you leverage your account to the extreme any hiccup on the chart can force a margin call and whip your account. Therefore we settle with a 1% margin thus levering up our account by a factor of 100.
A transaction of $100 000 with a one percent margin would require $1000 in our account.
Assuming that the exchange rate does not change and we keep our position for one year, our return on this investment would be.
$15 x 365 = $5475 or 5475%
Where can I start trading?
One of the best places to trade currencies is Forexyard, they offer SuperMini accounts from where you can start carry trading with as little as $100. There are no costs in opening an account and you can start trading within minutes.
Open an account and become a carry trader now
The risks with carry trading
We consider normal economic condition to consist of economic growth, moderately rising stock prices and slightly rising prices. When any of these parameters change markets get nervous. When it comes to currencies the greatest fear is sudden and unexpected interest rate changes. This risk increases when economic conditions deteriorate.
For carry traders an unexpected interest rate cut can cause huge losses.
In fear of losing money carry trade positions will be canceled which causes the exchange rates of low yield currencies to rise.
If you decide to participate in the currency market it is essential to follow closely all economic statistics that can as pieces in a puzzle help you get a picture of the state of the economy and its implications on the currency market.
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