How To Trade the Carry Trade Strategy Part 3 
How To Trade the Carry Trade Strategy Part 3
by InformedTrades
Video Lecture 36 of 61
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Date Added: May 7, 2017

Lecture Description

www.informedtrades.com/26167-how-trade-carry-trade-part-3-a.html

As we have learned in our first two lessons on the carry trade, it is the size of the difference between interest rates in the countries whose currencies we are trading that ultimately determines how much we either pay or receive for holding a position past 5pm New York Time. With this in mind it is only logical that if the difference in interest rates between two countries changes, then so will the rollover amount that is either paid or collected when trading those country's currencies.

As a quick example lets take another look at the NZD/USD. As of this lesson if we were to buy the NZD/USD currency pair then we would earn $10 for each contract we held past 5pm NY time. As we have learned in our first two lessons the reason why we would earn $10 is because we are long the NZD where currently interest rates are at 8.25% and short the USD where interest rates are currently 2% as of this lesson. So with this in mind we are long the positive interest rate differential of 8.25%-2% which equals 6.25%.

Now lets say in our example that interest rates in the United States went up by 1% to 3%, while interest rates in New Zealand stayed the same. If this were to happen then our positive interest rate differential of 6.25% would drop to 5.25%. Very simply here, as the positive interest rate differential has decreased the amount of money that we earn for holding the position has decreased as well.

Conversely, if rates were to rise in New Zealand and stay the same in the United States then the interest rate differential would grow in our favor, and the amount we earn for holding a position past 5pm should grow as well. So you can see here that one of the first things that must be considered when thinking about a carry trade is what the current interest rates are, and what they are expected to be for the life of the trade.

A second thing which must be considered when thinking about a carry trade is the exchange rate fluctuation that may occur while a trader is in the position. Traders may consider a number of things here, the most popular of which are one of or a combination of:

1. Capital Flows: Most importantly here is interest rate expectations which as we discussed in our lesson on how interest rates move the forex market, when interest rates rise in a country, interest bearing assets generally become more attractive to investors, which will many times drive the value of a currency up all else being equal, and vice versa when interest rates fall.

Notice here that I say interest rate "expectations". As we have talked about extensively in module 8 of our free basics of trading course, markets anticipate fundamentals so in general once an interest rate increase or cut is announced, it has already been priced into the market.

2. Trade Flows: Most importantly here is affects on the current account.

We will be discussing how traders go about forcasting changes in capital and trade flows in the coming lessons. The third thing which traders focus on and which we have already covered in our basics of trading course is:

3. Technical Analysis: As carry trades are generally longer term trades many traders will look at the overall trend in the market and use technical analysis to try and determine when they think the trend is going to be in their favor if they open a carry trade.

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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