Carry Trading: What Is It and How to Profit From It?

This article will describe this long term trading strategy used mostly by institutional investors. We will be highlighting rewards and risks in a simple way to make it possible for you to use it as well.

With carry trading, you can make or lose money even if the price of a currency pair remains static for a long time. It will also help you understand the reasons behind some of the market's moves, especially during volatile and risk-off periods.

What is carry trading?

Even though it is possible to have carry trades in a variety of financial instruments and investments, the basic premise is the same.

Positive carry trading occurs when someone borrows an asset with low interest rates to finance the investment in an asset with a higher return. For example, borrowing money at 2% and then investing the funds in an asset that pays 5%. This is easily done in the Forex market because currencies are traded in pairs, so a positive carry trade is obtained when a trader buys ("carries") a high interest rate currency (for example, AUD) and sells a low interest rate one (such as JPY).

Negative carry trades, as expected, are the opposite of positive carriers strategy. This situation happens when the yield of holding an asset isn't sufficient to cover its financing costs. For example, shorting AUD/JPY.

So how does this type of trading work in Forex?

Because you're holding positions overnight, interest much be debited/credited when the contracts are swapped, depending on the interest rate differential between the two currencies, and whether you're long or short. You always "receive" interest on the currency you own, and "pay" on the currency you sell. Then the differential is debited/credited on the account.

If the currency you bought had a higher interest rate than the other one in the pair, that's a positive carry. The opposite would be the negative carry.

How to make profit with this financial instrument?

The best potential carry trades are obviously the ones where there is a big interest rate differential between the two currencies, but that alone is not enough. For a trade to be profitable, your position should at least maintain its value over time. However, in some cases, if the interest rate differential is very big it may be possible to make money even if the market moves slightly against your position.

Remember this type of trade does not yield good profit in a very short run. Instead, the trade yields good profit with a long term strategy.

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Binary Options Technical Indicators That Work!

Technical indicators that work in binary options trading, can dramatically improve the opportunity for success as a trader. An integral aspect, to enhance winning, is to have a system that utilizes indicators from three main categories, which signal the optimal time to enter a trade with a trader's confirmation of market movement.

In this article, I will articulate the three main categories of indicators, that when utilized in combination, a trader can gain the upper hand and improve the opportunity of winning a trade.

The first category of indicators that a binary options trader may utilize, in order to assist in analyzing the markets, are momentum indicators. An example of indicators in this category include those that measure "relative strength of a trend" (RSI) or a "moving average convergence/divergence" indicator (MACD) that may reveal the change in market momentum. The changes in momentum analyzed by the MACD indicator may include direction, duration and strength which all encompass momentum of a moving market.

The second category of technical indicators are comprised of trend indicators. An example of trend indicators may include "Moving Averages" (MA) which may indicate support and resistance levels, "Bollinger Bands" (BB) which measure a moving average of highs and lows based on previous trades and "Parabolic SAR" (Stop and Reverse) indicators. These type of indicators measure potential market trends as they develop and can assist the trader in analyzing the optimal time to enter a trade.

The third category of technical indicators are volatility indicators. An example of volatility indicators include "Standard Deviation" (SD), which measures and quantifies variations in market movement at a set value, or the "Keltner Channel" which measures market flow through moving averages and channel lines that are set at a certain value range above and below the moving averages (MA). These type of volatility indicators provide important value to range trading in response to market highs and lows.

There are many other indicators that can assist the trader in analyzing market conditions in the three main categories of momentum, trend and volatility. Some of the indicators mentioned above such as MA's and BB's may also crossover or overlap in another category. The important aspect of utilizing indicators is having a combination that strikes the categories of momentum, trend and volatility in order to analyze the best markets condition that optimize a trader's opportunity for profit.

In optimizing the opportunity for profit, the trader may also utilize a customized set of indicators that alerts the trader on when certain market conditions have been analyzed, and signals when a combination of set parameters have been met. These type of custom indicators can be the best alerts for the trader to analyze and confirm market conditions before entering a trade.

There is no magic formula for the trader, for experiencing a high winning percentage of trades. The diligence in properly utilizing indicators, in combination with analyzing and confirming market conditions, is the formula that best enhances the trader's opportunity for success and earning profit from trading.

A customized set of these technical indicators, that work together to signal the trader monitoring the market, can dramatically enhance the opportunity for a winning trade and earning consistent profit. Developing a reliable trading system that signals the trader can be a complex task that is best suited for experienced market traders that understand price action. The complexities of a system can be made by an experienced developer and can be simple to use. A system developer that understands market dynamics will be able to create a system that takes into consideration indicators from the three main categories. For the trader, utilizing a customized trading system can make trading as simple as listening to audio and looking at visual alerts that confirm the best opportunity for a winning trade.

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Bollinger Bands: Using Volatility As a Technical Indicator

Day traders use Bollinger Bands® as a technical indicator to display a chart reading of volatility by how tight they are around a financial instrument. The degree of tightening or widening them surrounding the price action of a financial instrument determines the level of volatility. Chart facing, a 21-day moving average (preferred period of time) is surrounded by an upper and lower Bollinger Band®. They are meant to serve as a technical indicator of overbought (wide bands) and oversold (tight bands) market conditions.

How Are Bollinger Bands® Read?

Looking at financial instrument charting software with 'tight' Bollinger Bands® applied to the price action, a significant move to the up or down side may occur soon. However, if a financial instrument chart has 'wide' bands applied to price action, this may signal a significant move is not likely to occur in the not too distant future. Tight and wide, they can also be used as a counter technical indicator of both potential low and high volatility in that present price action is used to predict a different, future market move.

With the above said, the best conditions for the indicator's use are periods of low volatility with scant price fluctuation. The more time passed in a low volatility environment, the more they will tighten around a financial instrument's price action. When tightening more than usual, the bands may be signaling an increase in future volatility.

How Can Bollinger Bands® Be Used?

When analyzing Bollinger Bands® with the intention of day trading online, do not rush to make a decision if price action breaches the top or bottom band, as this is not always an indication of an immediate market move. That said, though most price action movement occurs within the indicator, a breach of an outer band is a rare occurrence indeed, but cannot be relied on to be a guaranteed buy/sell signal. In addition, though widely used, Bollinger Bands® are actually meant to be used in tandem with two or more other technical indicators such as Relative Strength Index (RSI) and MACD.

It is important to note, before day trading based on a signal derived from Bollinger Bands® and two other indicators, backtesting historical market trends with all of these indicators is strongly suggested. Backtesting these indicators against the historical market trend you are focusing on will provide an idea of how your strategy would have performed in historical market conditions.

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