So. Carry trades.
Trading off of difference in interest policies and percentage seems like a nice and very understandable little concept. But is it as simple as it strives to seem?
Well. There are several points that I might go over to show you all of the sides of carry trades.
For example: what is the main advantage of putting down a carry trade in the forex market? The fact that the interest difference payments are happening every day is pretty neat.
There is also another side to this. When you leave your position open for the night your broker is going to close it and reopen without you even noticing. This is called rolling over or carrying. For this the brokers are likely to charge you a percentage of your position, but it is usually a very small amount – 1 or 2 percent.
It is time for examples now.
Let’s say you have acquired $10 thousand. And you want to make profits off of it. And you have just opened a pretty good account with this broker you found online. What can you do? Of course you open a position with currencies having 5 percent annual interest. You also take advantage of that 100:1 leverage offered by the broker who holds $1 thousand of margin amount.
So. Now you have $100 thousand on your hands. What’s next?
Well. The market can go down. That means that you are going to lose everything in your account up until the margin level.
The market can be still. You are not going to see any gains but you are going to profit off that 5 percent interest. That means that you are going to take home additional 5%. Just by making the right choice. With your initial investment of $10 thousand it is 50% gains.
And in case the market goes up you are not only going to see the 50 percent interest increase, you are also going to take home the profits.
All you have to do for that scenario to happen is to choose the right couple with the best interest rate difference. Looking and analyzing the situation around each of the currencies is going to help you choose the best pair with no turmoil surrounding them.
That is how you carry a carry trade!