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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Taking A Look At The Forex Calendar

A Forex calendar is a document that has all the important economic indicators and events. The document helps you in keeping track of the Forex estimates made by Forex experts. As a trader, you will find all the information that you need in order to predict the future.

Where to Find A Forex Calendar

There are many calendars provided by different brokers and financial organizations. All you need to do is to go online and find these calendars. If you are working with a professional broker you will definitely find a calendar on the broker's website.

You can also make your own calendar. Here you need to visit the online calendars and choose the most important indicators and paste them into your document. You should then choose the ones that are of importance to you and save. This will help you to act accordingly.

Indicators Found On the Economic Calendars

Indicators are the ones that give you information about a given survey or occurrence. Some of the notable indicators that you will find on the calendars include:

Consumer credit report: popularly known as CCR, this is a report that aids in estimating the changes in the dollar amounts brought about by the issuance of unsecured loans aimed at purchasing consumer goods.

Although, the indicator isn't a big market mover, it will help you in predicting the future spending levels of the consumers-if more loans have been given it means that consumers have more money to spend. The report also aids in informing you on the position that you should take when trading the retail sales and personal consumption reports.

Consumer confidence index (CCI): it's usually released at 10am EST of every Tuesday of each month. It's usually a survey of over 5,000 US households and it intends to show the spending power, financial health and confidence of the average American consumer.

The survey comes with three headline figures: the index of consumer sentiment, current economic conditions and index of consumer expectations. This survey is usually a big market mover since the confidence of the consumer is of great importance for the performance of the country as a whole.

How to Read The Forex Calendar

It's very easy to read the calendar as all the information you need to know is given to you in black and white. The information comes in different colors where red is the most important, orange is less important while yellow shows the information is not important at all.

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