Forex Trading – How To Profit From The Carry Trade

| September 1, 2009 | 0 Comments

George Soros made more than $1 billion in a single day.  Private equity firm, Thomas H. Lee, bought Snapple and made over $1 billion.  And, Andrew Hall made $100 million this year trading oil for Citigroup.

Huge paydays of $100 million or more are infrequent, but not uncommon.  Smart, professional money managers make upwards of several million dollars a year.  The average money managers might only make $1 million (and that’s the average guy).

Nice job huh!?!

Wouldn’t you like to learn some of these millionaire’s secrets?  I’d like to capture some of the big profits these guys make.

Ever wish someone would show you how they do it?

Well, today I’m going to do just that.  I’m going to tell you how multi-billion dollar hedge funds capture big gains consistently.  Only there’s a twist.  It’s not done by trading stocks, or bonds, or commodities.  They do it with currencies!

Now before you decide it’s too complicated, give me a moment to explain.  Then I’ll show you an easy way you can do the same thing.

The technique used by huge hedge funds is called the “carry trade”.

It’s an easy way for a currency trader to make good money capturing yield.  It’s kind of like buying stocks for the dividends… only now you’re buying currency.

Follow me here for a second as I jump into the weeds.

Currency trading isn’t like other markets.  When you trade currency, you are always trading in pairs.  Currencies move relative to each other… if you buy the euro because it’s going up, you need to sell another currency going down.

It’s like a teeter-totter on the playground.  One kid gets on each side and they bounce up and down.

It’s the same thing with trading currency.  If you pick the euro to go up, you must pick some other currency (like the US Dollar) to go down.

It makes trading a little more complicated, but once you understand the premise, it’s easy.  Just remember, everything is relative… if one currency heads up, the other is moving down.

But that’s not the secret.

If you’re a student of the currency market, you’ll know each and every currency has an interest rate.  For example, right now the US Dollar interest rate is 0.25%, the Japanese Yen is 0.10%, and the Australian Dollar is 3.00%.

Every currency has an interest rate.  These rates are set by the country’s central bank.  The EuroZone is the only exception.  There, the European Central Bank sets the EuroZone Euro interest rates.

Here’s the key.

If you buy a high yield currency and sell a low yield currency, all things being equal, you keep the difference.

For example, say you buy Australian Dollars yielding 3.0% and sell Japanese Yen yielding 0.10%.  If the exchange rate stays stable, you’d make 2.9% (3.0% minus 0.1%).

Now it doesn’t sound like much, but realize some aggressive traders use leverage.  And if the currencies move at all in your favor, you make even more money.  In our example, if the Australian Dollar moves up or the Japanese Yen moves down… that’s a recipe for big money.

That, in essence, is the carry trade.

Now imagine doing it on a massive scale, with millions and millions of dollars.  That’s how these hedge funds make money day in and day out.

Now, I know it sounds a bit complicated.

But there’s an easy way you can profit from the carry trade.

Powershares has an ETF that does the carry trade for you.  They take the 10 major currencies – U.S. Dollars, EuroZone Euros, Japanese Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone and Swedish Krona – and look for the top and bottom three yields.

They buy the three highest yielding currencies and sell the three lowest yielding currencies.  It’s just like the carry trade.  Not only do they capture the difference in yield, but they can profit from the movement of the currencies.

Take a look at PowerShares Harvest Currency Fund (DBV)… it’s an easy way to profit just like the big hedge funds do.

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Category: Currency Trading

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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