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    Foreign Exchange: Carry Trades


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    Before going on with candlestick reversal patterns Id like to talk about something different forex and Carry Trades.

    Carry Trade strategy is a long term investment strategy in foreign exchange market. It is mainly used by hedge funds and investment banks. In simple words it means playing with interest rates. When you trade a currency and then keep it overnight then two things can happen you either pay for the overnight holdings or you earn interest rate for the carry over. I must admit that when I tested with Easy Forex test account then I only paid interest rates. But as Im learning now, it looks like vice versa is also very possible and also very popular. Note though that earning with just interest rate movements in foreign exchange markets is mainly done as a long term strategy that lasts minimum of 6-12 months.

    How is it possible anyhow? Basically each country has its own different interest rate (that is always changing of course). If you buy a currency with higher interest rate and sell a currency with lower interest rate then the gap between them is the interest rate % that you can earn (or pay). Note though that the interest rate for the main countries in foreign exchange vary usually between 0 and 6%. And this percentage applies for a year. So if youd like to know how much eg 3% interest rate is worth to you daily then lets imagine we have one big lot of 100 000 in hand. Now 100000*(3%/360)=$8.3 meaning that with a capital of $1000 and leverage of 100:1, in this case, you could earn or lose $8.3 with a daily rollover. As you can see the amounts are not big, but in some cases might be worthwhile to think about.

    Popular currencies to trade for that purpose are AUD/JPY, NZD/JPY, GBP/JPY and GBP/CHF thanks to the difference in their interest rates.

    Note though that while it is more than possible to earn with interest rates this way there are several things to consider. For example, the currency rates are changing all the time and if you bought currency that is going down then it will eventually cost you considerably more than you can actually earn with the carry overs. Secondly, keep in mind that carry over strategy IS a long term investment strategy not a short-term trading strategy.


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