www.informedtrades.com/25861-how-trade-carry-trade-part-2-a.html

As we saw in yesterday's lesson, if a trader buys the NZD/USD currency pair, then as of this lesson, they will earn $15 per contract held past 5pm NY time on Monday, Tuesday, Thursday, and Friday. As we learned in our lesson on rollover in module two of this course, they will earn 3 days worth of rolls or $45 on Wednesday to take into account Saturday and Sunday when the market is closed. This brings the total interest paid for the 7 days in the week to 7 * 15 = $105. As there are 52 weeks in a year if a trader held this position for an entire year and the rollover rate did not change, they would earn (105 * 52) = $5460 in interest from the rollover portion of the trade.

At the current market rate for NZD/USD as of this lesson of .7687 this is an annual return from just the rollover portion of the trade of $5460/$76,870 = 7.1%. This of course makes the large assumptions for simplicity's sake that the exchange rate and rollover rate will remain the same as they are today for the 1 year period that the trader is in the trade.

Now you may be thinking to yourself at this point, "well Dave I was kind of excited about this whole carry trade thing and was seeing how it was so popular until I see a 7.1% return plus all the caveats. To be honest with you this does not get me too excited and I don't really see why this is all that popular."

As some of you may have already realized however, if we were to utilize some of the leverage that is available to us in the forex market as we learned about in module two of this course, then we might be able to take that 7.1% return and juice it up into something a little more interesting. So with this in mind, lets say I leveraged this position 2 to 1, which most traders I think would agree is still pretty conservative. This would double the return from the rollover portion of the trade to 14.2%, a return that if generated consistently would out perform the long term average return of the US Stock market. Taking this a bit further, if I increased the leverage to a more aggressive 3 to 1, that would put my return from rollover at 21.3%, and if I upped the leverage to an even more aggressive 4 to 1 that would put me at 28.4%, a return that if I consistently generated year after year, would put me among the top traders in the world.

When people first see this many times their initial reaction is one of excitement, which makes them want to jump right into a trade. As with most things however, if making money was this easy then everyone would be a millionaire, so while this is an enticing return, and while there has been a lot of money made by people employing carry trade strategies, there are other things to consider:

1. Exchange Rate Fluctuations[/B] which can cause additional profits or wipe out all profits and cause losses on the trade.

2. Changes in Interest Rates[/B] which can increase the positive rollover, decrease it, or cause a trader to end up paying for holding the position instead of earning.

3. The Use of Leverage[/B] amplifies any gains made on the strategy but also amplifies any loss should the trade begin to work against the trader.

It is how traders deal with these unknowns that separates traders who consistently make money with carry trade strategies from those who do not, a topic which we will discuss in our next lesson.

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

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.