How to use low volatility Carry Trade Forex Strategies


Trending volatile market is an ideal Forex market condition for traders globally. I will spot some light on low volatility Carry Trade Forex Strategies today. How can you utilize these low volatility carry trade Forex strategies?

AtoZForex  We all know different Forex trading strategies such as swing trading, intraday trading, or scalping strategies. Most of the traders might also be aware of one more trading strategy known as Carry Trade Forex strategies. This type of trading strategy became popular during and immediately after the 2008 financial crisis era. The reason? Of course, monetary policy divergence between various central banks globally.

We will discuss later what made the Forex carry trade so popular only during the financial crisis period. Additionally, we will discuss how to use low volatility Carry Trade Forex Strategies.

What is a Carry Trade Forex strategy?

Carry tradeCarry Trade Forex strategy is a trading strategy in which an investor borrows a certain currency with a lower interest rate and then invests in a currency with a higher interest rate. The currencies of the country like Japan that has lower interest rates are borrowed and lend high-yielding bonds of emerging countries. As an example, the JPY are converted to USD which is invested in the higher yielding US Treasuries than the interest cost for the borrowed JPY. In this manner, because of the difference in interest rates, a positive carry is created.

The carry trade benefits mainly institutions, but it does not work so good for the average retail Forex trader. Why is it so? It is because, institutional traders do this with a leverage of 100 or 300 to 1 and this creates great moves in the financial markets. For calculation purpose, if we just consider a leverage of 100:1, it gives a 1% rise in the value of the USD versus JPY. In addition, it doubles the value of the equity investment. Moreover, additional profits are made if the USD trends up against the JPY and also if there is a rise in the prices of the US Treasuries. Also, the positive carry generates further profits. This is a “triple profit.”

Currently, Japanese and Turkish traders utilize significant carry trade orders on Turkish Lira pairs. However, in some brokers trading Turkish Lira pairs for the sake of carry trade strategy is forbidden.

The role of interest rates in Carry Trade Forex strategy?

Besides Turkish lira pairs, another common carry trade pair is AUDJPY. AUDJPY pair is considered as a carry trade pair due to the higher interest rate in Australia rates compared to Japan. On the other hand, Japan for some years has had lower interest rates making JPY the lowest yielding currency among the majors. Using your Forex trading leverage, you can generate profit on the difference between the two interest rates. However, you can do this just by entering a long position on AUDJPY. Furthermore, you can even reap the advantage of leverage-magnified position just by carrying the trade over.

As a rule of thumb, in order to generate profit via Carry Trade Forex Strategies, the high-yielding currency needs to be trending up or at least remain steady in relation to low-yielding currency. Although, historically carry trading traders and investors used to maintain the carry for months or even years, now this period has gone down few days to few weeks mostly. I understand, waiting can be boring, however patience pays. You should also consider reading my top 3 ways to increase Forex trading motivation on this topic.

How to use low volatility Carry Trade Forex Strategies

If you are wondering about how to use low volatility carry trade Forex strategies let me give you some examples:

At the moment, EURTRY swap rate is at over $66 per lot for short positions. Thus, if you are shorting 1 lot of EURTRY you are going to be securing yourself a wopping profit of $66 a day. Some traders managed to get a no Swap accounts in their local brokers (e.g. Turkish brokers) where they would be longing EURTRY. Now, the Turkish traders are taking advantage of this Turkish Lira carry trade forex strategy opportunity. They are simply opening two accounts, one with a Turkish Broker and another with an international broker who offers a positive swap for short positions. Now, they will short EURTRY in international broker and long it in Turkish broker. These traders would benefit this set up the most in case of low volatile market condition. By only risking EUR128.5 this example makes over EUR 1520 profit.

EURTRY carry trade Forex strategy Chart: EURTRY carry trade Forex strategy

Low volatility market is a boon for the carry traders. During low volatility market conditions, currencies tend to be indecisive and stay flat from trend point of view. However, it is because of this reason that the carry trade became more popular during the financial crisis era. Moreover, it becomes quite easy to maintain a trend during the periods of solid economic growth and little turmoil. Also, when there is economic progress, the interest rate hike becomes more likely, such as the US Fed rate hikes.

Reading the 3 reasons why market volatility is falling now can be quite helpful if you want to know more about volatility and how to take advantage of it. Carry trading Forex strategies are fairly simple. These strategies have a straightforward methodology to make a buck in Forex market. Therefore, high volatility or low volatility carry trade forex strategies are becoming more an more popular. However, bare in mind if your broker is a market maker, you are likely not to have the right SWAP rate or even if you have your broker is likely to refuse your profit. Check out the list of reliable Forex brokers approved by AtoZ Forex team of experts.

Think we missed something? Did you find these low volatility Carry Trade Forex Strategies helpful? Let us know in the comments section below.

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