An Expert Guide To Learn Advanced Trading Strategies For Forex – Part 2 [Carry Trade Strategy]
INTRODUCTION • One of the most important aspects of currency trading is creating an effective Forex trading strategy. To make a profit, traders should work on reducing losing trades and improving winning trades. • Any trading strategy that helps you achieve this goal has the potential to be rewarding. In general, several types of traders have established a wide range of trading tactics to help you earn in the market. • A trader must learn Advanced Trading Strategies that are appropriate for their forex trading and investment horizon.
SEVEN KEY FOREX TRADING STRATEGIES: Experts from The Fido Academy will go through seven key forex trading tactics in a set of well-defined articles as part of an endeavor to educate and enlighten the minds of prospective traders. Breakout Trading Strategy Carry Trade Strategy Fundamental Analysis Strategy Momentum Trading Strategy Range Trading Strategy Trend Trading Strategy Moving Average Crossover Strategy Each article is easy to understand and ideal for individuals who are still honing their skills. In previous article we saw the Breakout Trading Strategy and now We'll take a closer look at the Carry Trade Strategy in this article.
WHAT IS A CARRY TRADE STRATEGY? • A Carry Trade is an investment strategy in which a high-yielding currency funds a low-yielding one. A trader who employs this method tries to profit from the disparity in rates, which can be significant depending on the level of leverage used. • In the forex market, the carry trade is one of the most common trading methods. Because the interest rate spreads on these currency pairings are relatively broad, the most popular carry trades have been buying currency pairs like the Australian dollar/Japanese yen and the New Zealand dollar/Japanese yen. Identifying the high-yielding and low-yielding currencies is the primary stage in putting together a carry trade.
THE BASICS OF A CURRENCY CARRY TRADE: • The Carry Trade is among the most often used currency trading methods. It's similar to the adage "buy low, sell high." The comfortable pathway to start a carry trade is to spot which currency has the highest yield and which has the lowest. • The most common carry trades include buying currency pairings with wide interest rate spreads, such as the AUD/JPY and the NZD/JPY.
Mechanics of the Carry Trade: • As long as the exchange rate between the currencies does not change, a trader can profit from the differential in interest rates between the two countries. Many professional traders utilize this strategy; since the profits can be substantial inclusive of leverage. If the trader in our example chooses a common leverage factor of 10:1, he stands to profit ten times the difference in interest rates.
Best time to Get in and Get Out: • When central banks are increasing or considering hiking interest rates, it is the perfect time to enter a carry trade. Many people are jumping on the carry trade bandwagon, causing the currency pair's value to rise. Similarly, at times of low volatility, these trades work effectively. Because these traders are willing to take on more risks, The Traders will get rewarded until the currency's value does not collapse. • However, traders will not benefit awesomely from a period of interest rate lowering in Carrying trades. The change in monetary policy has resulted in a variation in currency values. When interest rates fall, demand for the currency falls as well, making it tougher to sell the currency. Essentially, there must be no movement or some degree of appreciation for the carry trade to be profitable.
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