When do carry trades work and not work?

When do carry trades work?

Carry trades work in forex when investors are more optimistic to buy high yield currency investments and sell off the low risk currencies.

Some of the pairs include, NZD/JPY,AUD/JPY, NZD/CHF,NZD/JPY,USD/JPY.

This is when investors’ sentiment towards the market is positive towards high risk currencies compared to safe haven currencies.

When the country’s central bank increases or plans on increasing the interest rates.

The currency appreciates in value.

As a result more investors will be attracted by the currency’s appreciation and high yield from the high interest rate.

Therefore will make the carry trades work in forex since many investors will buy more of the currency.

Carry trade always works better in forex when the markets are optimistic.

Uncertainties  and fear cause investors to unwind their carry trades.

When do carry trades not work?

When the countries economic conditions are not good and the central bank decides to cut the interest rates.

This discourages foreign investors and those holding the currency chose to sell  it off  looking for more yielding investments.

Carry trades criteria and risk

Criteria

Find a pair with the highest interest rate differential

The pair should be stable or in favor of an uptrend for the currency with a high interest rate.

Carry trade Risk management

Identity your risk before entering a trade.

Study the current economic conditions in the countries involved and relate to fundamental and technical analysis.

Check your position size and money management principle.