Probably the most popular strategy in forex trading
is the currency carry trade. This involves selling a currency with low
interest rate and using the funds to buy a whole different currency
with much higher interest rate. The strategy works best for traders who
want to capture the differences of the interest rates of two currencies
which actually turn out to be substantial depending on the amount of
leverage a trader uses.
To illustrate, if a trader chooses to
sell a thousand Japanese yen with an interest rate of 0%, convert the
funds into U.S. dollars and then buy another currency of an equivalent
amount that pays a bond of 4.5%, the trader will automatically gain the
4.5% profit given that the exchange rate of the two forex currencies
remain the same. This may not sound like a considerable amount of
winnings but when you take into account the amount of leverage a trader
uses, the gains become quite large. Again to illustrate, if the
leverage in this case is 10:1, the trader may profit up to 45%.
The
same thing happened back in mid-October 2005. The New Zealand dollar
yielded 6.75% interest rate up to 7% before the month of October ended.
At the same time, the Japanese yen yielded 0% based on the Bank of
Japan's zero interest rate monetary policy. This forex market status is
the perfect atmosphere for a currency carry trade. That time, it is
said that traders have won greatly into the cross as the value
increases up to 400 pips between July and October 2005.
Timothy Stevens is a Forex Options Trader who owns http://www.NonDirectionTrading.com - He has helped hundreds of people on Trading Forex with Options.
He
has recently developed a free e-course showing you a step by step
process for starting your Forex Trading easier. To learn how to start
Forex Trading with Options without wasting your time and losing more
money, visit http://www.NonDirectionTrading.com/members/FreeReport.htm
