Hi everyone,
Looking at the idea of carry trades. Seems like a good amount of interest can be earned using this method when trading the right pairs. Would it be feasible to enter into trades just before the daily close, collect the interest, then close the trade right after? Assuming the pair would not fluctuate much within the few minutes either side of the daily close. Would this be a profitable approach? Keen to know what people think.
What you described is not a carry trade strategy.
Its simple overnight holding in hope of raping in interest rates differences.
A carry trade is a trade (the word trade is missleading here. Very missleading) which functions as follows:
You take loans in a area which gives loans for little interest. Like for example japan where you can get a loan for starting from 0.5%.
With that money you purchase assets (usually stocks or bonds) which yield a higher dividend than your credit costs.
Example:
Put up margin in a japanese bank of 100.000
Get a loan of 900.000 on intestest of 0.5%
Your annual financing cost = 4.500
Buy assets with a high divident payout. Like ford or GE or bonds.
Assets you purchased pay out 4% divident in average (you purchase low risk and medium risk assets for diversification)
On your 1.000.000 inestment you recieve 40.000 dividents.
Your net profit of this financial advanced operation is 35.500 anually.
The target here is to cheaply financy a so called self carrying asset
In order to make this advanced financial operation a secure money generator you must hedge your USD nominated assets with the JPY loans. In order to make sure fluctuations in usd/jpy do not wipe out your profits over the course of the entire year you purchase leveraged derivatives warrants on usd/jpy. Those derivatives will cost you another 0.1% in financing costs which takes away from your profit another 1000 usd but makes your net profit dummyproof.
This way you raped in 34500 profits on a 100.000 investment. Or in other words: 34.5% with little to zero risk.
That’s not a carry trade, but there are people who have a strategy based on opening a position just before 00:00 and close it shortly after to pocket the interest. The problem tends to be that the pairs with high interest rate differentials are exotic pairs and have a large spread, which is often larger at the time when the interest is paid. This tends to mean that you don’t actually make much money at all.
You’re likely to be more profitable by picking a pair that has a positive swap rate and likely to be a long term winner. For example GBPCHF would give you a little bit every day in interest, and in time will likely go up, however it could yet go down a lot more depending on what happens with the political situation and Brexit, so not necessarily a good idea
Maybe this type of trading strategy plays well in purely trendy market! Otherwise, you’ll suffer!