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Carry trade - can not be directly meaningful translation from English. Carry usually translates to carry, and trade - trade. Carry trade - is not entirely clear phrase. Deeper knowledge of English will give us a very different result.
Carry has many meanings in English, and one of them: adding numbers - adding numbers. Thus, carry trade - a trade that adds a number (the account).
forex strategy sarry trade based on the difference in interest rates for different currencies. Probably, many experienced a similar phenomenon in everyday life. Banks offer deposit in rubles at 9-10 percent per annum in dollars - under 5-6 per cent per annum, and in Europe - under 2-4 per cent per annum. Now imagine that you have the ability to borrow, For example, under the Euro 4 per cent per annum, to convert them into rubles and put on deposit at 9% APR. It is this possibility and provides a strategy forex carry trade.
Forex Strategy Carry Trade - Basics.
Forex trade strategy sarry uses the following benefits foreign exchange market: the ability to borrow any of the rates on bail deposit, the right to borrow money at 50, 100 and even 400 times more than the size of the deposit, the opportunity to buy a currency with high interest interest rate.
Consider a simple example. On our account with a broker forex is $ 1,000 and the broker provides to us to use the leverage of 1:100 (That gives the right to purchase any of the currencies in the $ 100,000 bail the original $ 1,000). On these hundred thousand dollars we have the right to borrow 10.6 million Japanese yen at the current rate of 1 dollar = 106 yen. To these we can Yen to buy 50 961 pound sterling at the rate of 208 yen per pound.
Please note that currently available in the yen debt by 0.8% per annum and bought pounds can be stored account in exchange for 5.45% per annum. so one year we will have to pay 10.6 million: 100 * 0.8 = 84 800 yen or 84 800 106 = $ 800. At the same time, Pounds will give us profit: 50 961 100 * 5.45 = 2777 lbs or 2777: 1.955 = 5540 dollars.
That is our annual income is 5540 dollars, the cost $ 800 dollars. Thus, the profit is equal to 4740 dollars or a 474% per annum from our original one thousand dollars. There is natural question - what's the catch here? Indeed, it is impossible forget that the Japanese yen loan was obtained on bail deposit. This means that there is a risk of loss of deposit instead of profit.
Forex Strategy Carry Trade - Risks.
In the above example was obtained by the maximum possible loan in Yen at the rate of 1 dollar = 106 yen. But we must not forget that price currency changes all the time and 1 dollar can cost 120 yen, and 99 yen. It's the same with the pound. Once the price we bought pounds reduced by $ 1,000 - the account will be closed and our losses are $ 1,000. If you recall, that was purchased 50 961 pounds, podeshevlenie pounds less than 0.02 dollars (2 cents) will lead us to bankruptcy.
pound change in the price of two cents a phenomenon almost daily, so keep your initial investment in such approach is practically impossible.
forex strategy sarry trade can and should be used for almost guaranteed income. But not because it was described in the previous example.
The main enemy of the investor - the desire to get the maximum possible profit. Such an approach inevitably leads to an increased risk and, as a result of capital losses.
In the example used leverage of 1:100, and all deposit in full. This made it possible to get profit 474% annum at the highest possible risk for the entire deposit.
To minimize the risks necessary to take certain measures. At a minimum, you can take the following steps:
1. Keep the account in the forex broker is not more than half of the funds intended for use in Forex. The rest of the hold on bank deposit, so that at the onset of risk margin Coke to be able to quickly increase your brokerage account.
2. For open positions using no more than 5% of the funds to brokerage account at 1:100.
3. Use the diversification, opening the position for several couples, bringing carry trade profits.
4. Do not buy exotic currencies. These currencies are usually give a huge carry trade income, but tend to change their price abruptly, that gives rise to a margin cola.
5. On each currency pair to open positions fractional gradually entering the market.
You should also consider a few things about which we should not forget when you use this strategy.
First , it must be remembered that over time changing the very foundation of this strategy, namely the interest rates on currencies. Demonstration of this is the unprecedented decline in bank interest rates on the dollar for only a few months, which led to that advantage for the dollar to yen, or Swiss franc fell sharply.
Second , it must be remembered of the possibility of margin call. Use of any strategy to stop without orders can lead to loss of deposit. Therefore, before opening the bids, it is necessary available to accurately calculate the margin of safety by determining at what value may occur margin call. Usually, it seems quite acceptable if the design margin call is offensive to boundary of ten high or low.
Third , you should realize that these are the maximums and lows and are the most preferred entry points. For example, 99 yen to the dollar (March 2008) may be a point because the situation is so expensive yen rare. Log in with this ratio gives a fantastic margin, and given that Yen is quite expensive, not only the dollar but the pound Sterling, you can spend and some diversification.
be recalled also that the carry trade strategy has many variations, and everyone can choose for themselves the most appropriate tactics to use it. But we must not forget that assets held in brokerage (forex) account are not insured. And in If a broker or ruin his unlawful actions an investor can lose their money. This is the most critical time for long-term strategies, and coca strategy is the carry trade.
In conclusion, I would add that the window of opportunity opening in our life is not so often. And the greatest number of advocates policies carry trade, oddly enough, does not appear in when you can buy "cheap" pound or dollar for "Expensive" yen. And when the yen is cheap and all are optimistic that it will be cheaper, and more. Such optimism is often a cause of ruin. Morally difficult to invest in desheveyuschie assets, but this approach can yield maximum results. Buy cheap, sell dear, and in between to receive interest income - This is the strategy of carry trade.