Carry Trade is one way to get profits or profits in the forex market through the difference in interest rates between currency pairs that are being transacted in addition to the profit or profit that can be obtained from the difference between the selling and buying prices of the two currencies. But not always carry trade activities can generate profits so that we as forex traders must know when the carry trade is able to generate profits or losses.
The Right Time to Carry a Carry Trade Strategy
So that by knowing the exact time to carry out a carry trade strategy, we can reduce risk and maximize profits or we can call this the term risk management.
Well, on this occasion we will discuss when is the right time to carry out a carry trade strategy when running a forex trading business.
Carry trade can generate the most profit when investors or forex traders are able to feel the risk and are very optimistic to buy a currency that is able to provide higher returns and sell currencies that provide lower returns.
So, when the current economic conditions are not ideal, they (investors / traders) hope that things will happen better.For example, economic conditions may not be good but it is expected that the prospect of buying currencies must be better.Why?because the central bank will regulate its currency.
So in essence, if economic conditions get better then it is likely that the Central Bank will raise interest rates to control the inflation rate.And this is very good for carry trades because the higher the interest rate that will be raised, the greater the carry trade value (the difference in interest rates).
So this carry trade can work well if the interest rate difference between the two currency pairs gets bigger.
Conversely, when the prospect of economic conditions does not show a positive thing, no one will buy the currency because they think that the central bank will definitely reduce interest rates to stimulate economic growth.
So, simply carry trades can work well when investors have low risk aversion.
Carry trade will not work well when it has a high risk aversion that is by selling a higher yielding (interest rate) currency and buying back a lower yielding currency (buga rate).
Let us be clearer, let’s take the following example, say when the economy is in a difficult situation and the country is in a recession.What do you think your neighbors will do with their money?
Yes!Your neighbor will definitely put the money in the safest place of investment even though the important small yield is something that is a safe and sure investment.
And this is very natural because it is the nature of humans who want to anticipate the conditions of everything that is not desirable, such as losing their jobs and so on.Activities that your neighbors do have a high level of risk avoidance.
This is not much different from the institutions or big investors when facing bad economic conditions like this.They will put their money into safe haven like US Dollar and Yen with low interest rates.