Carry Trading Can Be Very Profitable When Managed Properly

Think of it is a high yield CD. This is a risky investment due to the volatility of foreign exchange rates. The saying goes that a higher reward brings higher risk. In this article I will give some helpful hints on how anybody can make money by carry trading.  I will also recommend which currencies to invest in for the carry trade and tell you what the basic carry trade entails. A brief overview of carry trading

Big financial institutions will borrow money at the short term interest rate and invest it at the higher long term interest rate. In order for this strategy to be profitable, they need billions of dollars and a steep yield curve. At the household level, a family gets an ARM instead of a fixed mortgage for the lower interest rate then tries to sell their house for a profit before the rates go up. In the examples I will provide, carry trading is comprised of two countries' currencies. Currencies are traded on the spot market in pairs. The most popular currency is the US Dollar. The current interest rate for the US is 5.25%. The current interest rate for Switzerland is 1.75%. If an entity bought US dollars and sold Swiss Francs that would be a carry trade. Investors would pay 1.75% interest to sell Swiss Francs and they would receive 5.25% interest for buying the US Dollar. That would be an annual return of 3.5% Currency trading is commonly traded by institutions on 10:1 leverage. The institution uses $1 to control $10. This magnifies 3.5% to a 35% annual return. Some brokers give 100:1, 200:1 even 400:1 leverage. Think about a 1400% annual return paid daily.

Popular currency pairs used for carry trading

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