Though it’s one of the simplest and most popular trading methods ever, carry trading on an Ideal Trading Platform still seems confusing for new traders. One reason for this is the risks behind such method. We’ll get to know those later. But for now, let’s take cue from expert reviews like FXempire Forex Review and learn a little bit about what carry trading really is.
When you use carry trading, you buy a high interest currency against a low interest one. Your broker pays you the interest rate difference between those two currencies for each day that you hold them. This can continue for as long as you trade towards an interest-positive direction.
When you do carry trading, you have the chance not only to get trading profits but also interest earnings.
Carry trading enables you to utilize leverage in the best possible way. Every time the broker pays you the daily interest on your trade carry trade, the payment of the interest must be on the leveraged amount.
If you have a mini lot, or 10,000 USD, and you only need to use around $250 of your actual margin to open a trade, you could be paid daily interest on $10,000 instead of only $250. Of course, you can accumulate your earning and you would have huge yearly returns.
Just like any other trading strategies, carry trading has risks inherent to itself. You should be aware of them.
Generally, those currencies best suited for the carry trading method are extremely volatile. This means that you have to perform carry trading with all the caution and prudence you can muster. The market can typically have quick, tremendous effects on your currency pair. Without proper and well-planned risk management strategy, you could be ambushed by market surprises. You could end up losing brutally.
You might experience one of the worst case scenarios for carry traders—the “carry trade unwind.”
The carry trade unwind is some sort of a surrender happening worldwide out of a carry trade. This often results to the funding currency—the currency that is exchanged, typically the currency with low interest rates—rising aggressively.
You can celebrate and consider yourself a big lucky trader if you make an interest positive trade on a currency with a high interest rate, and the rate stays the same. However, you can lose as much as you can win if the tide goes against you.
The daily interest rate payment given to you via your account can help mitigate the risks, though it won’t probably enough to offset a kinds of trading loss. You can imagine carry interests as some sort of a bonus, attractive feature of the carry trading method.
You can try to use paper risk management. Do not be reckless and fight the urge to just grab out for the daily interest rate earnings. Remember that because there is leverage involved, the small payments that you make can lead to enormous losses if you don’t do your trades right.
What you can do is throw some fundamental analysis in the mix, plus some market sentiment. The most ideal time to perform carry trading is when the market feels safe, with upbeat sentiment here and there.
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