If you invest in currencies, it is likely that you have heard of the term carry trade. This strategy has generated positive average returns since the 1980s, but only in the past decade has it become popular amongst individual investors and traders.
What Is The Carry Trade?
Mechanically, putting on a carry trade involves nothing more than buying a high yielding currency and funding it with a low yielding currency, similar to the adage “buy low, sell high.”
The most popular carry trades involve buying currency pairs like the Australian dollar/Japanese yen and New Zealand dollar/Japanese yen because the interest rate spreads of these currencies pairs are very high. The first step in putting together a carry trade is to find out which currency offers a high yield and which one offers a low yield.
One needs to be careful; if your chosen currency goes down in value against your low interest yielding currency more than the positive interest rate difference you could lose.
To read the full article by Kathy Lien go to Investopedia.com .
I hope the above currency trading article was of help to you.
Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.