So we presume that this is not the very first article about the details of the answer to “What is Forex Trading?” As you clarify yourself on the details of the trade, we also believe that you have been exposed to several trading strategies or styles that you can adopt during your sessions. Right now, we are going to introduce another strategy which will serve as additional knowledge and back up in case you would need to apply an appropriate strategy for a specific situation.
What is Carry Trading?
This forex trading strategy involves borrowing an amount for a low interest rate for the sake of investing with a hope of gaining higher return of investment. With this kind of trading style, you have to make sure that you have great skills on picking currencies that have abilities to stay stable.
Advantage of Carry Trade
1. Boosts demand for high-interest rate bonds
Carry trading practice gives the privilege of steady return on a high yield currency. You have to note that this strategy can even make wonders especially when a country with high-interest rate currency is able to appreciate it. If this happens,the investor is allowed to withdraw the bonds and it will be enough to pay the loan using a low interest currency. Therefore, the remaining money shall be considered a profit for the investor.
2. Boost currency value
We have mentioned a while ago that carry traders seek high interest rate currencies. If several traders would avail of a particular currency, the demand gets high and such action will lead to the increase in the value of currency. As for the trader, a highly valued currency will make way for profits and higher yield bonds.
CarryTrading and Bankruptcy
The worst thing that can ever happen to a carry trader is when his account becomes bankrupt. Bankruptcy is actually the gravest risk that a potential carry trader should take note of. This could happen if the currency values become reversed. What we are trying to say is when the high value currency suddenly becomes low valued and the low valued currency becomes high valued. Remember that every currency trader aims for higher yield so they could pay the borrowed amount and keep the difference. If reverse value happens, the trader will be forced to produce an amount which is higher than expected to pay the loan. Since the targeted currency already had lower value to that of the borrowed currency, he will have to shoulder the deficit to pay everything.
Just like what most experts disclose when discussing “What is Forex Trading?” Every strategy has its own risks and advantages. In order to fully enjoy the benefit of carry trading, a trader should always make it a point that he trades and follows the strongest currency. Thus, it is necessary to keep track of currency values to be able to create an effective plan as to which currencies should be utilized for the loan and what currencies would be traded to pay the loan.