A carry trade is defined as borrowing a currency at an interest rate to purchase another with a higher interest rate. The trader profits from this trade by borrowing at the low-interest rate currency and converting it into high yield currency
The name carry comes from the return on the investment, which is something ‘to carry’ for the trader. Carry trade is also known as long-term trade. It implies that most of the time, money, or both will be invested for more than one day.
Benefits of using Carry Trade
Traders can profit from carry trading by getting higher returns on investment with no need to tie up their capital since they are using others’ money, so-called ‘borrowing’. This kind of speculation enables traders to borrow money through brokers at the lowest possible interest rate, usually very low. With multiple currencies available in the market, traders can choose which currency to borrow money from according to their preferences.
Carry trade is quite helpful to the people who want to invest their money in a safe option other than bank deposits. The traders should have a solid knowledge of financial markets and have clear goals about the desired returns on their investments.
Some leading broker companies provide an opportunity for trading with different types of carry trade. These include short term, medium-term and long-term carries. Each type has its risk factor that needs to be considered before entering into any carry trade deal.
Choosing a carry trade investment option
When choosing a specific carry trade investment option, many factors need attention. One of the most important is ‘How much money do you have?’. If you have a significant amount of money, then spread your funds among different trades and if you don’t, then lock your money into one deal.
To identify opportunities for entering into carry trade, traders should closely monitor global economic data releases since they are an essential factor influencing different currency pairs. With high liquidity conditions prevailing during market hours, traders can quickly execute trades without any hassle. This way, trading becomes much more profitable for everyone involved and keeps things more straightforward because there’s no need for monitoring markets around the clock.
Risks associated with Carry Trade
Here are three risk factors to consider when trading the carry trade in London:
Interest Rates Fluctuations
Considered one of the safest trading strategies globally, a carry trade returns high profits from the minimal initial investment and doesn’t have negative payback options. However, costs can spiral out of control quickly if interest rates drastically change in the market. A carry trade that uses short term loans is very sensitive to interest rate fluctuations and is most likely to suffer when there are changes in the benchmark interest rates of major currencies.
Banks’ Currency Exchange Regulations
Banks in London may also limit the amount investors can borrow for carry trade, so it’s important to understand these regulations before jumping into this type of trading strategy. Firms offering forex trading services should provide comprehensive information on any limitations or restrictions imposed by banks when engaging with this strategy to ensure that customers know what they’re getting into.
Currency Fluctuations
The main goal of a carry trade is to ride on high volatility with speculative knowledge about different markets, and currency fluctuations can lead to significant losses if this point is ignored. Take advantage of the carry trade when there is expected positive market sentiment and do not engage in such a strategy when uncertainty or negative public perception surround exchange rates.
Bottom line
Always choose a reliable forex trading platform with relevant market data and relevant information on any restrictions banks impose before engaging in a carry trade to avoid risks and limit potential losses in London. New investors who want to trade Forex should use a reputable online broker from Saxo Bank before trying different forex trading strategies.
