How To Trade the Carry Trade Strategy Part 1 
How To Trade the Carry Trade Strategy Part 1
by InformedTrades
Video Lecture 34 of 61
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Views: 377
Date Added: May 7, 2017

Lecture Description

Practice trading the carry trade strategy: bit.ly/IT-forex-demo3

View full lesson: www.informedtrades.com/25717-how-trade-carry-trade-strategy-part-1-a.html

As we learned about in our lessons on how rollover works in module two of this course, when holding a position past 5pm NY time traders earn interest when they are long the currency with the higher interest rate. Conversely, when traders are long the currency with the lower interest rate they pay interest when holding a position past 5pm NY time.

Like the US investor in the example from our last lesson who took his US Dollars and invested them in New Zealand Bonds to earn a higher return, currency traders can also take advantage of countries which offer higher interest rates. Luckily for us however taking advantage of interest rate differences between countries is generally much easier for currency traders who can do so with a simple click of the mouse.

To help demonstrate this lets look at the interest rates as set by the central banks for the main currencies which we are interested in. As you can see here and as we went over in our last lesson, rates as set by the Federal Reserve in the United States are currently at 2%, and rates as set by the Bank of New Zealand are currently at 8.25%.

Now lets bring up a screen shot of the simple dealing rates window of the FXCM platform and locate the New Zealand Dollar/US Dollar Currency pair. If we buy this currency pair, then we are long the New Zealand Dollar which is the higher yielding currency, and short the US Dollar which is the lower yielding currency. With this in mind we earn $10 per contract held past 5pm NY time as shown in the Roll B column of the simple dealing rates window. Conversely, if we sell this currency pair then we are short the higher yielding New Zealand Dollar and Long the lower yielding US Dollar, so we pay $15 dollars per contract held past 5pm NY Time, as shown in the roll s column of the window.

As you can see here, we can take advantage of the higher interest rates in New Zealand by buying New Zealand Dollars and Selling US Dollars with the click of the mouse, and without having to go through the trouble of figuring out how to buy New Zealand bonds as we would have had to in our last lesson.

Because of the simplicity of this strategy and the fact that in addition to the interest that one earns by being long the currency with the higher interest rate there is the opportunity for capital appreciation should the higher yielding currency move in one's favor, this is a hugely popular strategy. This is important to us as traders not only because it is a strategy that we may want to consider trading at some point, but also because a huge amount of capital flows in and out of currencies based on this strategy, making it a major market mover in both the long and short term time frames.

Lastly, it is important to us as traders to understand that when a trader is long the carry, meaning that he or she is long the currency pair with the higher interest rate, then that trader is normally trading with the wind at their back as they are getting paid every day they hold their position, regardless of what happens to the exchange rate. Conversely when a trader is short the carry, meaning that they are long the currency pair with the lower interest rate, then they are generally trading with the wind in their face as they are paying money every day, regardless of what happens with the exchange rate.

Course Index

  1. An Overview of the Forex Market
  2. The Difference Between Over the Counter (OTC) and Exchange-Based Markets
  3. Who Really Controls the Forex Market?
  4. The Role of the Retail Forex Broker
  5. How Central Banks Move the Forex Market
  6. How Banks, Hedge Funds, and Corporations Move Currencies
  7. A Breakdown of the Forex Trading Day
  8. Forex Trading - Characteristics of the Main Currencies
  9. Setting Up Your Forex Trading Software
  10. Forex Trading - How to Read a Currency Quote
  11. Forex Trading - Understanding Currency Rate Movements
  12. Forex Trading - Understanding the Bid/Ask Spread
  13. How to Place Your First Forex Trade
  14. How to Determine Your Position Size in the Forex Market
  15. Forex Trading - Pips and Fractional Pip Pricing
  16. How to Calculate Forex Trading Profits and Losses
  17. An Introduction to Leverage in Trading
  18. How Trading on Margin Works
  19. How to Calculate Leverage in the Forex Market
  20. How to Calculate Leverage in the Forex Market Part 2
  21. How to Place a Market Order in the Forex Market
  22. How to Place a Stop Loss and Take Profit Order in Forex
  23. How to Place A Pending Entry Order in the Forex Market
  24. How Rollover Works in Forex Trading
  25. How Rollover Works in Forex Trading Part 2
  26. Free Forex Charts Userguide
  27. What Moves the Forex Market? - Trade Flows
  28. How Capital Flows Move the Forex Market
  29. The Current Account: How Forex Traders Can Use it to Identify Opportunities
  30. Interpreting the Capital Account and Measuring Capital Flows
  31. Fundamentals that Move Currencies - Balance of Payments
  32. How Interest Rates Move the Forex Market Part 1
  33. How Interest Rates Move the Forex Market Part 2
  34. How To Trade the Carry Trade Strategy Part 1
  35. How To Trade the Carry Trade Strategy Part 2
  36. How To Trade the Carry Trade Strategy Part 3
  37. Fundamental Analysis Vs. Technical Analysis in Forex
  38. Forex Trading Fundamentals Quiz - Test Your Knowledge
  39. Why the US Dollar is Still King
  40. Determining the Fate of the US Dollar
  41. Determining the Fate of the US Dollar Part II
  42. Determining the Fate of the US Dollar, Part III
  43. Economic Releases that Move the US Dollar
  44. A Trader's Introduction to the Euro
  45. A Trader's Introduction to the Euro, Part II
  46. A Trader's Introduction to the Euro, Part III
  47. A Trader's Introduction to the Yen
  48. A Trader's Introduction to the Yen, Part II
  49. A Trader's Introduction to the Japanese Yen, Part III
  50. A Trader's Introduction to the British Pound
  51. A Trader's Introduction to the Swiss Franc
  52. A Trader's Introduction to the Canadian Dollar
  53. A Trader's Introduction to the Australian Dollar
  54. A Trader's Introduction to the New Zealand Dollar
  55. Why Choosing a Forex Broker is so Confusing
  56. Choosing a Forex Broker: Regulation and Financial Stability
  57. Choosing a Forex Broker Part III: Transaction Costs
  58. Choosing a Forex Broker, Part IV: Technology & Add-ons
  59. Choosing a Forex Broker: Evaluating Customer Service
  60. An Introduction to Forex Capital Markets (FXCM)
  61. An Introduction to DailyFX Plus

Course Description

This 61-video series is an introduction and in-depth look at the forex market, including how to place trades, the fundamentals of the forex market, profiles of the main currency pairs, and factors to consider when choosing a forex broker.



This is a continuation of The Basics of Trading course by Informed Trades.

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