Page 105 - Ultimate Guide to Currency Trading

AUD, NZD, MXN, and ZAR will fall considerably when the world's stock markets get even the tiniest bit
deflated or corrected. A few percentages to the downside of a currency pair can really go a long way in
keeping your carry trade in the profit point.

When you read in your broker's statements that a correction is coming in the AUD/USD or
other classic carry trade, get your calculator out and commit 3-5 percent of your total capital to this
type of trade. The trade should be long AUD/USD and it should be set up to fire at a preset entry point.
If your broker is recommending or you have noticed that the AUD is fading against the USD, then put
in an order for entry into the trade at about a 3 percent correction of the price. It might take a bit of
calculation, and the price might seem far away from where it is currently. The idea is to have your
order filled when there is a big correction in risk assets. It is then a good time to get into the carry
trade.

Some carry trades can last for years and years. A classic example is the carry trade that
went on between the JPY and the AUD and NZD from 2005 to late 2008. Carry traders all
over the world quickly reversed these positions during the 2008-2009 banking crisis,
causing the carry trade to collapse very quickly.

Once in the carry trade, do not set a take-profit point to exit the trade. In fact, the best thing
to do is to walk away from that trade mentally. Bury that trade deep in your mind, and only look at it
every week or so. It will accumulate interest and grow in price over time as the trade gets back up to
the level it was before the correction. Carry trades sometimes go on for quite a while.

Just to keep things conservative, if (in this example) the AUD/USD pair gets back up into the
range that it was before the 3-4 percent correction, then it is safe to close out the position and take
your profits off the table. Remember you are trading at 50:1, and a 4 percent gain would equal a 200
percent gain. If you had a $10,000 portfolio, and you committed 5 percent to the trade, you would
have made $1,000 on the trade ($10,000 x .05 x 50 x .04 = $1,000).

Of course, a true carry trade can go on for several months and even up to a year. If the carry
trade is set up properly and things go well, it is possible to earn 8-10 percent on a carry trade within
six months, not including the interest that is being earned minute by minute! This can equate to a
$2,500 return on a $500 investment six months earlier.

You should keep different mental buckets in your account for different types of trades. From
the ultrashort, lower-percentage gain scalping trade, to the automated overnight trade, to the long-
term, high-percentage gain carry trade, each has its own merits and each has its own place in your
currency trading system.