A question I’m asked all the time by traders is – how do you execute the carry trade?
Years ago I wrote a book called “Adventures of a Currency Trader,” and a lot of people still ask me about it, especially the part where I talked about some of the big carry trades I used to take.
But what is the carry trade?
It’s best explained through an example.
Pretend it’s 2007, back when I wrote that book. Let’s say I buy a high interest currency like the British pound, the New Zealand dollar, or the Australian dollar. I would hold those in my account and every day that I held those trades I’d get paid interest on them.
For instance, I used to go long the British pound-Japanese yen and as long as I held that trade, I’d get paid. That’s called swamp or rollover in the world of forex.
When I was doing this trade, I would also simultaneously sell the British pound-Japanese yen, and I had a special arrangement with my broker to do that where I didn’t have to pay any interest. So I was perfectly hedged.
But that’s only one part of how I used the carry trade.
Every system that I’ve ever traded with any amount of success and any amount of consistency came from a rule-based system that could be repeated over and over. As part of that, I’d build spreadsheets to manage all of the money in each account and would try to keep all of those level at all times.
If one account was making money on the other was losing money, I’d transfer money from one account to the other and try to stay in that position for as long as possible and earn interest day after day after day.
The reason that I did that was, back in those days the forex market had 2-to-1 leverage. So, on a trade that had $100,000 on each side, we could make $2,000, $3,000, $4,000 or more a day in interest.
But those days are over. Super high interest is gone and the days of huge leverage are in the past.
But it’s still important to understand how this all works, because you can still do some types of carry trades. In fact, you can still actually buy and sell high interest currency pairs and hold onto them and earn interest.
It’s just that the currencies have changed.
Let’s say for instance that you’re looking at the Turkish lira-Japanese yen pair. You can buy that on every dip that you see and, as long as you hold onto those trades past 5:00 PM New York time, you’re going to get paid interest.
No, it won’t be as much interest as before, and there’s no crazy leverage, but as a trade it still works.
Ever wonder what’s worth trying to control and what to let go of? Well, I believe it’s all about controlling what you can’t control. Check out my recent issue to see what I mean…