Simple Forex Strategy
Simple Forex Strategy
The carry trade is one of the simplest and most popular Forex trading strategies in use today. For this reason, there are now many traders who are making the move from regular trading techniques to this simple Forex strategy. In its simplest form, the carry trade strategy could be defined as the act of buying a higher interest currency and trading it against one from a country with lower interest. The carry trader then profits from the differences in interest between the two currencies over the course of the trade. However, it should be noted that successful carry trading is dependent on trading taking place in a positive direction.
Carry Trade Example
A good example of a carry trade is when a trader chooses to go long or buy the GBP/EUR currency pair at a time when the British pound (GBP) enjoys a 4 percent interest rate while at the same time, the interest rate on the euro (EUR) stands at 2 percent. Each day that the carry trader holds the trade, they are paid 2 percent, which is the difference between the interest rates of the two currencies. In time, this could add up to quite a significant amount of profit on the trade. However, if you are looking to start carry trading, there are a few important points that you need to observe for your success.
Develop a Routine and Always Stick to It
The first thing that you must do if you are to be a successful with this simple Forex strategy is to adopt a consistent routine, which can help you crystallize your trading decisions. This is a process that should involve consistent study of charts, continuous scanning of the different financial markets and analysis of economic calendars so as to identify opportunities as well as any dangers which could present themselves. Always maintain a high level of consistency when making your analysis of the currency markets and only make trades that follow your laid-out trading guidelines. However, simply having a strategy in place should not stop you from acquiring additional knowledge or learning new and emerging techniques. You can only beat an ever-evolving market through flexibility.
Anticipate Your Margins and Decide the Best Time to Execute
Another essential tip in carry trading is to always anticipate how usable margins evolve in relation to your total investment. This allows you to calculate the risk you are taking on beforehand. Multiplying your margin factors by the amount you have at stake gives you the margin. This needs to be more than 3 percent of your total trading account.
When all factors are considered, it pays to put in a lot of thought into this aspect and then execute your trades accordingly. Find out if there is a trend in the market that you should ride or whether to use momentum oscillators to wait for the trend to reverse. Determining the momentum of the market is the best way to decide when you should enter a Forex trade.
Technical Analysis Is Essential
When you are a carry trader in the Forex market, it is vital to ensure that any decision you make is backed up by two or more types of technical analysis. In this way, you can easily identify the key support and resistance levels in the market. Besides the risk – reward ratios, knowing the key support and resistance levels will prove to be invaluable in helping to decide when to enter or exit your carry trades.
As with any other simple Forex strategy, you should always use your head and manage the risks of your trade properly each time you enter the currency market. The way to find success in Forex trading with the carry trade strategy is to combine the prevailing sentiment in the market with supporting fundamentals and technical analysis.