The Carry Forex Trading Market

The Carry forex trading market is a very difficult approach to trading. But if planned well, it means that the trader can achieve riskless arbitrage trading.

What the Carry Forex Trading Market is about

The Carry forex trading market is about profiting on the interest rate differentials between two currency pairs. The term Interest Rates sounds like a microscopic, tiny opportunity for profit, which is true most of the time. Since when a person hears the term Interest Rates. They are reminded of the ultra low rates they are getting on their savings bank account. But because forex trading involves the use of leverage, which in many cases is 200 to 1, the effect of the interest rate factor is massive. The forex trading market allows Carry traders to profit on a daily basis (excluding weekends), since they will be getting paid the difference between two interest rates. It is a strange and difficult method, perhaps one of the most difficult forex trading strategies, but it is real. Trading forex this way, removes the work required, for predicting perfect market direction. All the trader has to do is on risk hedging. One example of a Carry trading opportunity of recent years was that between the Japanese Yen and the Australian dollar. At some point interest rates in Japan were zero, and in Australia were 4%. Carry traders profited from this by going long the AUD/JPY currency pair. This meant that they were getting paid interest 4% (times the amount of leverage they used) on their account, while at the same time paying nothing on the JPY component. So it all looks nice and easy, but there the big risk of the market (AUDJPY in this case) falling too much below the trader’s entry price. Which could cause massive losses. So massive that the losses in just few days of declining prices could in fact dwarf the Carry profits collected over many months. So there is definitely risk involved!

The Carry Forex Trading Market and Risk Hedging

The Carry forex trading market comes with its big risks. As live forex rates can move too much against you, even in as short a period as a single trading day. But there are ways to hedge much of the risk through long term correlations. Correlation are long term anyway. And in the case of various currency pairs, where a Carry trade opportunity appears, traders can use correlated commodities for protection. In the above example of AUDJPY for example, the Carry trader is long this currency pair, and depending on the account leverage used, they might commit $50,000 to the Carry trade. And they will make for example around $300 per business day, if the market stays flat. They will make more if the market rises. And they will lose it all if the market falls. But what if the entire trade is hedged against price fluctuation risk in both direction, through an investment in physical gold or a CFD trade in the gold market. In that case, it would have been possible for AUDJPY Carry traders to keep that