Currency Trading Online
The Carry Trade: The carry trade is beloved by currency traders and hated
by
governments as it is a purely speculative trade based on the
differential between countries interest rates, resulting in
weakness or strength in the currency being driven by the
speculators - something all central banks and governments hate!
Currency Trading Online : The Carry Trade
The carry trade is a popular strategy as it provides a return on the trade and offers the opportunity to make two lumps of profit. Firstly from interest generated from the differential in interest rates, and secondly from the trade itself. The strategy is essentially a long term trade, so if you are trading long term, and have identified a trend in a pair that offers a carry trade potential - excellent. This is my preferred use of the technique, as long term trades of months, and in some cases years, can be expensive if the interest on the trade is working against you - but always remember your reason for entering the trade should be based on long term fundamentals and trends, not because the pair offers a positive interest rate on the trade, as you will need to have a good idea of where the interest rates are heading in the future. Entering a carry trade can be easy - exiting can be more difficult. In order to enter the trade correctly you need to buy the currency with the high interest rate and sell the currency with the low interest rate.
Currency Trading Online : Popular Currencies For Carry Trades
So which are the most popular currencies and pairs? - I have itemised these below, and also provided a link to the Oanda carry trade calculator which will give you an idea of the interest you can generate on a carry trade:
| Currency | Symbol | Interest Rate | Carry Trades |
| Japanese Yen | JPY | Low | |
| Swiss Franc | CHF | Low | |
| Euro | EUR | Low | EUR/JPY, EUR/CHF |
| Canadian Dollar | CAD | Low | CAD/JPY |
| UK Pound | GBP | High | GBP/CHF, GBP/JPY, |
| Australian Dollar | AUD | High | AUD/JPY, |
| US Dollar | USD | High | USD/CHF, USD/JPY |
| New Zealand Dollar | NZD | High | NZD/JPY, |
The ones shown above are the main ones. In order to help you work out the interest rates I have included a link to the Oanda interest rate calculator. This will pop up in a small new window on the same page
If you enter the following details, it will calculate the interest rate on the carry trade automatically:
- Primary Account - enter USD
- Currency Pair - use the drop down box to select
- Ignore the next three boxes ( trade price, current price, current price )
- Action - enter buy or sell using the drop down box
- Number of units - I would suggest 10,000 ( 1 mini contract )
- Hours held - 24 hours will give you the daily rate
- Lend interest and borrow interest will be filled automatically
- Press the calculate button
- The interest earned will appear in USD in grey
That's about it on the carry trade - now we need to have a look at the different types of online currency brokers, and the ones you should avoid!