The forex carry trade strategy is very popular among long term currency traders, hedge funds and banks. It takes advantage of the interest rate differentials between two currencies while also hoping to benefit from the long term trend in the pair.
200 SMA (200 period simple moving average)
The strategy is pretty simple to explain. A trader needs to buy a high yielding currency while simultaneously selling a low yielding currency to earn daily interest.
The table above shows the current interest rates for the major currencies.
Let’s take the AUD/JPY long trade as an example
The interest rate differential is 3.90%. A trader will earn 3.90% a year in interest. Assume someone holds 1 standard lot (worth $100,000) of AUD/JPY for 12 consecutive month. The total positive interest credited towards the trading account will be $3900.
How to trade the forex carry strategy properly?
Always use the carry trade strategy in conjunction with a forex trading system or trending strategy. Trade only in the overall direction of the high yielding currency (in this case the AUD). Please bear in mind that the carry trade strategy is a long term investment strategy, so trade off daily or weekly forex charts.
Let’s pull up a long term AUD/JPY forex chart for further explanation. We use a moving average cross-over strategy to manage our carry trades. (moving average default values are: 200 SMA and 5EMA).
My General Trading Guidelines:
Set stop losses below the most recent levels of support. Profit targets should be at least twice the risk taken on each carry trade. Move stop loss to break-even once profit equals the risk, thus removing the risk from being stopped out at the original stop loss. When to close a trade? Always close a trade when the moving average cross-over generates a signal to sell the AUD/JPY.
Now, let’s get back to the chart.
The black circles tell us where to go long AUD/JPY. The first trade was opened at 74.10 price and the second at 80.12.
Risk: 353 pips
Target: 353 x 2 = 706 pips
===>> This trade was successfully closed for 706 pips of profit + interest.
Risk: 450 pips
Target: 353 x 2 = 900 pips
===>> This trade is still open at current rate 86.42. That’s a 600 pip gain so far! Stop loss moved to BE.