What are the criteria for a trade to qualify as a carry trade? We can review some of those critical elements with you right now.
You are looking for two things when you are trying to find a carry trade. They are:
- You want to find the highest interest rate differential that you can
- You would prefer to find a pair that is a stable or rising trend for the higher interest currency in the pair
It can seem pretty easy, but it may take a while for you to find both of these things in combination.
Here is an example of one trade that worked beautifully for people using a carried trade strategy:
It is the weekly chart of the AUDJPY pair from 2009 to 2010. The Bank of Japan had maintained a near zero interest rate policy (ZIRP) at that time. Meanwhile, the AUD currency was paying a rate of 4.5% interest.
From 2009 to 2010, the pair moved upward to the tune of 3,250 pips. When you add this to the interest payments that trades received during that period of time, it is easy to see why this was a popular and profitable trade for investors who had the stomach to handle the market ups and downs during that period of time.
Carry Trade Risk
There are certainly some risks that come with using the carry trade as part of your overall strategy. For one thing, your position could be completely closed out if you don’t have the margin necessary to maintain your trade. Thus, you may end up with some risk in the sense that the trade could move strongly against you and cause you to lose out on the interest that you may have gained in the meantime. Therefore, there is certainly not any risk-free trade opportunities in the world of Forex investing.
It is necessary to review the charts and try to figure out how to set up the right trades in pairs that more likely to appreciate in value over time. Otherwise, you may end up with trades that don’t go anywhere for you because you have not taken the time to truly figure them out like you should have. Don’t let that be your story.