Just rather curious since the returns can be awesome, especially with 100:1 leverage. I understand the AUDJPY and NZDJPY are the most popular carry trade pairs, along with some exotics like USDMXN. Is anyone willing to share on insight in how they approach carry trades? I’m guessing you manage a carry trade very much like a trend trade ie buy on the dips (if long) and I guess use price action + support/resistance to choose good entry and exit points?
I am currently studying carry trades, for the past few weeks I’ve taken an interest in, not only making money myself due to the carry trade via the overnight rate on MT4, but also looking at interest rates to determine where the big players will be placing their money. That is what truly affects the market.
You need to keep an eye on I.R., for us, the most important is the overnight rate, but since i.r. move in tandem I usually keep my eye on 2yr, 5yr, 10yr., 3 month, etc. It’s not the i.r. itself, you’ve probably heard but the Spread that’s important.
Remember that bonds can indicate two different things
(1) Moving up / Down in general shows general market risk sentiment
(2) I.R. spreads, movements of i.r. in comparison to each other shows where we can profit from carry trades.
Currently (and these change from time to time)
Safe haven / borrow currencies are USD, JPY and CHF
Investing currencies are
GBP, NZD, AUD, EUR
This means, you pick one safe haven currency and one investing currency and you should go long whenever the I.R. spread increases, short whenever the I.R. spread decreases (Some carry traders never go short). Of course you will have to study this and each pair has their own nuances.
You would still use technical analysis to determine entry and exit points.
Well said! Overnight rates matters for anyone who wish to carry trade.
Here’s something I’ve found about [B]Risk Aversion vs. Risk Appetite regarding Carry Trades[/B]:
[B]Risk appetite/Risk On [/B] means the market believes global economy is going to perform well and thus growth is going to be strong, commodities are going to be in demand and people are more willing to put on Risk trades. Risk trades mean people are much more willing to buy up the commodity currencies as they expect interest rates to go up – AUD, NZD, CAD. When risk appetite is present money tends to flow into the carry trades so generally the JPY gets sold and people buy AUD/JPY, NZD/JPY etc. Sometimes with Risk on depending on what the interest rate outlook for the U.S. is the USD gets sold as well. Equities tend to rally, emerging markets, commodities do well.
[B]Risk Aversion/ Risk off [/B]means the opposite of Risk appetite. People tend to take profits on their risk on trades causing AUD,NZD, CAD to fall. IF people believe the global economy is going to slow then they tend to sell commodity currencies. Sometimes the EUR,GBP will fall as well. Carry trade tends to unwind as well. If there is a full blown crisis aka second half of 2008 and everyone is scared of a global meltdown then the risk aversion happens but on a massive scale as people Buy JPY(carry trade unwinding) and USD (safe haven). Equities tend to drop, emerging markets drop , commodities drop as well.
Remember that when you are scouting for Opportunities you have to remember that Carry Trades are profitable when the market has Risk Appetite. That is when we make big $$$.
Keep an eye on these relationships.
That was very illuminating. Thanks for sharing it!
Carry Trade typically refers to the practice of borrowing money in one currency that charges very low interest and using that money to make investments denominated in another currency (that will provide a return greater than the interest rate paid to borrow the first currency).
Example: Borrow 10000 US at 5%, exchange your US dollars for Australian dollars, and invest the money in an Australian CD or other investment that pays 6-7%.
Finding a quality carry trade is getting tougher… I used to trade AUDUSD for the swap. But with recent reduction in interest rates it’s harder to make money at.
I think it is good idea to trade long AUDJPY.