Advantages of the Carry Trade
The currency exchange market has only recently been open to retail traders. It is therefore the most unexplored and virgin market for traders with a commitment and determination to succeed. Technical and fundamental analysis of most kinds are as valid in forex trading as they are in other kinds of trading activity, and a trader who is accustomed to trading in general will have little trouble in adapting to the forex market. There are however a number of strategies that are unique to forex, and one of them, the carry trade, is what we’ll briefly discuss in this article.
The carry of a currency pair can be compared to dividend of a stock held. As you hold a pair such as the EUR/USD, you receive the interest differential between these currencies as a constant stream of income. This amount is very small usually, but traders use leverage to amplify their gains, while controlling risk by using various different hedging strategies. The carry trade is extremely popular among traders of all kinds, and as long as banks around the world charge different interest rates, it will remain a very common strategy.
The advantages of the carry trade are manifold. It is a long-term strategy, and you don’t need sit to beside the computer all day every day in order to benefit from the strategy. It doesn’t require that you analyze every single piece of data that is released by the authorities and various other sources, but only that you have an idea on the direction of the interest rates of central banks. In addition, time is on the side of the carry trade. Each day that the trade is alive adds more of a buffer against volatility in the markets in the form of interest income, and that leads to greater survivability and a longer lifespan for the trade. Finally, the ability to get used to long-term strategies while practicing the carry trade allows the trader to get accustomed to more profitable and sophisticated strategies faster in general, which is a great benefit beyond the monetary gains of the carry trade itself.
Of course, it is crucial that the interest income received on the open position be sizable, and in this respect, not every broker is the same. The interest paid on open positions by different brokers is different, and thus the carry trader needs to scrutinize the choices available thoroughly before committing capital. In short, we need to ensure that we are trading with a top forex broker who offers the best opportunities for this strategy. The carry trade is without doubt a proven and well-understood way to trade the forex market, but as with all things, proper and patient consideration of your options will make your returns much greater than they would otherwise be.