Many people don't really get the "carry trade" strategy and why it's so great. Their focus is on the daily interest and they don't see themselves getting rich off of the daily interest. However, that's only ONE of the reasons why traders get into the carry trade.
Think of a carry trade this way. Let's say you have two banks in the same town. Bank A will offer you 3% in a savings account while Bank B will only offer you 1/2 of 1% (0.50%). Which one are you going to deposit money into?
Now, if you were a betting man or woman...which bank would you bet on having the most "inflows" of deposits? Of course, Bank A...because people aren't idiots and want to earn the most they can on their money.
Well while the carry trade isn't a "savings account" by any means...it works off of a similar principle.
Traders and investors alike want to earn the most that they can on their money. After all, the interest earned is the closest thing to a guarantee as you'll get. So investors look out in the "investing arena" and look to see who has high interest rates when compared to others.
It's no surprise that investors from all over the world pile into the same, few high yielding currencies.
Look at the chart below and you will see what investors all over the world are looking at. Now which currencies would you look into first? The U.S., Japan?....or Australia and New Zealand? Of course, the latter. Why? Because your mama didn't raise a dummy and you want to get the highest interest rate possible on your money.
Guess what? So does everyone else out there in the world. So it's no surprise that money flows away from the U.S. and Japan right now and into Australia and New Zealand. They're moving their money from "low yields" to "high yields".
So now that we can predict the "long term" flow of money...why not jump in the line now and allow all of the other future buyers of Aussie and New Zealand dollars push up our positions in these same currencies over time.
So if I buy any of these (as of the time of this writing): AUD/USD, AUD/JPY, NZD/USD or NZD/JPY then I can enjoy BOTH the money flow AWAY from the U.S. and Japan and the money flow INTO Australia and New Zealand. By capturing both dynamics...my positions ratchet higher over time WHILE at the same time, I'm earning DAILY interest while I wait for further appreciation in the pair.
When this strategy works: This strategy works when the global economy is coming out of a recession (past the trough of the recession) and in expansionary times when countries are doing good economically.
When the strategy doesn't work: This strategy doesn't work when the global economy is about to go into a recession (or for that matter, usually even when it's just the U.S. going into a recession).
Since expansionary times last longer than recessionary times, the strategy works, more times than not.
When it's not working....guess what? Short these pairs and you can make money that way.
Sean Hyman
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Sean, thanks for the informative post. I saved the currency strength calculator to my bookmarks. Do you use this in your trading at all? I used to use a website when I traded equities that showed me a heatmap of the s&p as well as etfs. This seems similar to that, except it does not show strength intra-day. Since trends last longer in the forex market it is probably better that way.
Sean, thanks for the informative post. I saved the currency strength calculator to my bookmarks. Do you use this in your trading at all? I used to use a website when I traded equities that showed me a heatmap of the s&p as well as etfs. This seems similar to that, except it does not show strength intra-day. Since trends last longer in the forex market it is probably better that way.
iceoverflow, I consider that one to be the best one to show you the "big picure".
However, you can go to netdania.com and choose their "products" tab and then their NetStation charts. Click on "Click here" on that page and it will launch a free java chart that will allow you to rank currency pairs intraday by clicking twice on the % movers column.
Try that and see what you think.
__________________
The DailyFX Forums have over 75,000 members, and many discussions going on at once. If you aren’t sure where to get started, email me with your questions and I’ll introduce you to the community and point you in the right direction. I look forward to hearing from you.
Sean Hyman - DailyFX Forum Moderator - shyman@dailyfx.com
iceoverflow, I consider that one to be the best one to show you the "big picure".
However, you can go to netdania.com and choose their "products" tab and then their NetStation charts. Click on "Click here" on that page and it will launch a free java chart that will allow you to rank currency pairs intraday by clicking twice on the % movers column.
Try that and see what you think.
Thank you, I like NetStation. It shows the percent daily change in the major pairs as well as gold and oil. I can show quotes and even a running chart.
This will come in handy for me. I can use this for daily change and the bookmarked one to see what currencies are up on the longer term. If a currency is up big in a month then the probability would be that the currency will continue its appreciation right since trends last much longer in the forex market? I know that with equities if something has been running for a month then it is due for a turn. My experience is not even a quarter long in Forex so I try to ask a lot of questions so I can learn.
Thank you, I like NetStation. It shows the percent daily change in the major pairs as well as gold and oil. I can show quotes and even a running chart.
This will come in handy for me. I can use this for daily change and the bookmarked one to see what currencies are up on the longer term. If a currency is up big in a month then the probability would be that the currency will continue its appreciation right since trends last much longer in the forex market? I know that with equities if something has been running for a month then it is due for a turn. My experience is not even a quarter long in Forex so I try to ask a lot of questions so I can learn.
The larger % gainers on the year tend to continue to have money flow into them due to money flowing into the strongest fundamental currencies like AUD.
Yeah, NetStation is awesome.
__________________
The DailyFX Forums have over 75,000 members, and many discussions going on at once. If you aren’t sure where to get started, email me with your questions and I’ll introduce you to the community and point you in the right direction. I look forward to hearing from you.
Sean Hyman - DailyFX Forum Moderator - shyman@dailyfx.com
The larger % gainers on the year tend to continue to have money flow into them due to money flowing into the strongest fundamental currencies like AUD.
Yeah, NetStation is awesome.
Thanks.
I have been using NetStation since lastnight. I heard when I began trading that currencies usually don't move more than 1% in a day. I like the percent changers, because I can see what is moving and wait for it to come back to hit a resistance area.
As part of my trading plan I wrote down what pairs trade on average so many pips during the different sessions. With this information I can get the average percent changes and will really help me to trade easier.
Thanks.
I have been using NetStation since lastnight. I heard when I began trading that currencies usually don't move more than 1% in a day. I like the percent changers, because I can see what is moving and wait for it to come back to hit a resistance area.
As part of my trading plan I wrote down what pairs trade on average so many pips during the different sessions. With this information I can get the average percent changes and will really help me to trade easier.
Correct, on an average day they are probably moving 1% or less, but there are the times when they have the big days when they move 2-3% in a day but these days aren't nearly as common as the 1% or less days.
__________________
The DailyFX Forums have over 75,000 members, and many discussions going on at once. If you aren’t sure where to get started, email me with your questions and I’ll introduce you to the community and point you in the right direction. I look forward to hearing from you.
Sean Hyman - DailyFX Forum Moderator - shyman@dailyfx.com
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