Carry Trade Strategy by Forex Signals site FxPremiere on Daily Forex Strategies used online when trading the financial markets.
Instead, the success of a carry trade depends upon the difference between the interest rates of two separate currencies.
What Is A Carry Trade Forex Strategy?
A carry trade forex strategy is the practice of buying currencies with high differential ratios.
When selecting prospective targets for a carry trade, we must take into consideration the expected changes in interest rates of both currencies. In this way, we stand to optimize the profit potential of each specific trade.
When using a carry trade strategy, we make our profit from the differences in interest rates between two currencies. However, that doesn’t mean that the changes in price between the two currencies are irrelevant. For example, if we were to choose to invest in a currency because of a high-interest rate but the price of that currency dropped, the situation is not beneficial.
Which Currency Pairs Are Best For The Carry Trade Strategy?
For that reason, a carry trade strategy is only fit for a sideways moving market. We must anticipate the movement of the price and only trade if the price is expected to remain more or less the same. Of course, the most profitable way to carry trade forex pairs is to combine it with other trading strategies. By selecting to enter a trade where we stand to profit from both price movement and from the differences in interest rates, we are able to maximize our shot at sustaining profit. However, while they sound easy on paper, finding opportunities like these can be a challenge.
High differential ratios are the first thing to look for when searching for a fitting currency pair. AUD/USD, NZD/USD, AUD/JPY and EUR/JPY are the most popular currency pairs when using a carry trade strategy as they represent very stable economies which have low-risk currencies. Given the consistent economic growth and active central banking intervention, these pairings are ideal places to find carry trade forex opportunities.
Remember, the differential ratio of a pair when buying is always the opposite of the differential of a pair when selling. This is an important point, so don’t get confused! Only enter a trade if it first exhibits a positive differential ratio.
Before placing the trade, make sure that the currency pair has been stable for a long time. Ideally, the pair should be in a slight upward bullish trend in order to avoid any unexpected market corrections.
Integrating the carry trade forex strategy into your approach to the markets is a good way to diversify risk. While technically one still buys and sells currency pairs to execute a carry trade strategy, the ultimate objective is different. By targeting strong currencies in stable environments, one is able to capitalize on appreciating pairs while eliminating the downside risk of aggressive short-term trading.