Make Money With Carry Trades

I don't know if I can call my current state of Forex trading a slump but February has been tough going for a couple of reasons.  I've been experimenting with a couple of new strategies and unfortunately I always do so on a live account.  This may not be the smartest thing to do but what's done is done.  I'm currently at -217 for the month.  The H-system is at -102 and Lien Schlossberg is at -83.  I found out the other day that when I signed up for the service, I signed up using quarterly payments.  This means that I have 3 months of their service.  I'm going to see what I can do to change this to monthly because what I've seen so far from them is less than impressive.  It's still early in the month so I have plenty of time to recover.

One addition to my trading history is the tracking of interest.  I've been talking to another trader about carry trades and I've also been reading about an interesting strategy on the Oanda forums.  You can read more about it but basically, this trader will buy a pair where the base currency has a higher interest rate, such as the GBP/JPY.  The GBP has an interest rate of 5.25% and the JPY is at .25%.  The easiest way to try to explain this is with an example:

First day: He'll buy the GBP/JPY at some predetermined time in the evening. 

• If target hits 100 pip profit, he will close position
• There is no stop loss
• If 100 pips profit target is not hit, the position remains open 
• He is collecting interest equal to GBP, JPY differential

Second day: 

• If the current price is below the price he entered but not more than 100 pips below, he sits tight.  Remember, this position is collecting interest.
• If the current price is over 100 pips below the price he entered at, he opens another position based on 1 percent of his NAV.  So he is scaling in (on a losing position)
• If the current price is above the price he entered, he closes the position at a profit

To continue the example, I'll assume that he either had to scale in or sit tight.

Third day: 

This is basically a repeat of second day steps. 

• If the current price is below the price he entered but not more than
  100 pips below, he sits tight.  Remember, this position is collecting
  interest.
• If the current price is over 100 pips below the price he entered at, he
  opens another position based on 1 percent of his NAV.  So he is scaling
  in (on a losing position)
• If the current price is above the price he entered, he closes the position at a profit

This strategy could incur significant drawdowns but he's also collecting a nice amount of interest on money that really isn't his (leverage.) 

I hope I'm understanding this.  It's not the easiest thing to explain.  Read over the thread at Oanda.  I'm not saying I'm going to use this but I've never really investigated carry trade strategies and I find it very interesting.

Oanda post

Popularity: 3%

Forex Carry Trades

Carry trades entail going long on a high yielding currency and shorting a low-yielding currency. 

For example, New Zealand currently has interest rates at 7.25%.  Japan has a 0% interest rate in place.  To execute the carry trade, one would go long on the NZD/JPY currency pair.  At the close of each day, you would profit 7.25 percent or 725 basis points.  This assumes that the spot rate remains static.  If the NZD/JPY pair is in an uptrend, you profit from the interest and the capital appreciation.

Carry trades are said to work best when investors are in risk-seeking mode or low risk aversion.  Inversely, they are least profitable during times of high risk aversion.  

This is hindsight and correct me if I’m wrong but if you had gone long on the NZD/JPY back in the beginning of 2005 and exited at the December high, you would have gained an estimated 1200 pips plus the interest of carrying the trade. 

1 lot trade

Capital Appreciation: 1300 pips x 8.50 = $11,500
Interest: About $14 a day x  240 days = $3,360

The pair has since retraced about 900 pips. 

$14 a day in interest isn’t alone worth it for the average day-trader which is why carry trade strategy is one of the favorite amongst global macro hedge funds and investment banks.  The interest alone for an investment bank with high leverage could be quite lucrative.

Popularity: 3%