Carry Trade for the Forex Trader

Advantages of the Carry Trade for the Retail Forex Trader 

The carry trade has been the darling of hedge funds and many individual traders during this decade. Created by the funding necessities of developing markets, and fueled by the excess cash created by first world nations, the carry trade represents the natural circulation of money through currency exchange between the different parts of the world, and as such, trading it involves the exploitation of a natural phenomenon for profit. It is akin to the position of the fisherman who throws a net on the migratory route of a school of small fish, and receives his windfall with little effort. He doesn’t cause the fish to migrate, but profits by the knowledge of natural phenomena. 

Indeed, we can compare the carry trade to the migration of birds and other animals. Like tangible beings, the abstract entity called money seeks better grounds where it can grow and bear fruits (in the form of interest income), and during its search moves from rich nations to poorer countries where it is more precious. It is a simple matter of supply and demand as well, since poor countries have less money by definition, and money is more precious at such places where yield is greater. 

The carry trade is more predictable than many other strategies. As long as there is a yield differential, and the world economy is not collapsing, capital will flow to locations that offer higher interest, and better GDP growth rates, because the opposite would be meaningless. The carry trade is also more profitable than other strategies which concentrate on the price quote alone, because carry traders receive both the price appreciation and the positive interest income from their trades. Finally, the carry trade as a strategy is at least partially based on fundamental analysis, and as such it allows better risk controls and grants a better understanding of the big picture to traders who possess the determination to use them. Carry traders need to be up to date with news and statistics, which hastens the education process and improves the odds of success when transition to other strategies is desired. 

Carry trade is a profitable method for amateurs and professionals. It is a tried and tested method that has made countless people rich over the past decades. It is of course risky, but all trading activity is risky, and it is the duty of any sensible, conservative trader to manage those risks responsibly. None of the disadvantages of the carry trade reduces the importance of the fact that forex trading strategies devised for and applied to carry trading show conclusively that this is a great method for traders of all backgrounds: only the naive would ignore the chance to try this approach.