Carry trading can be extremely profitable, but before any earnings come your way, determining the best time to enter must be your top priority.
Deciding if it’s the best time for a carry trade involves weighing several fundamentals, such as predicted interest rates, market sentiment, and economic and political factors.
Carefully considering these can maximize your returns and minimize risk!
The best times to carry trade often rely on sentiment rather than actual conditions. Here are the factors you need to consider when looking for the best time to carry trade in forex.
The key word here is outlook. Economic conditions may not be good, but the outlook is positive.
If a country’s outlook is positive, this could mean that central banks will raise interest rates to control inflation. That would make a good currency to invest in.
Here’s another factor that may not completely follow objective conditions. Market sentiment plays a crucial role in the movement of the market.
For example, Japan raised its interest rates for the first time in two decades this year. However, the market believes that the current interest rates will hold, and that Japan will not change it for a significant period.
Instead of pulling out their carry trades involving JPY, investors have adjusted their strategies.
Some banks are just more predictable than others. For example, the Swiss National Bank has maintained low interest rates for decades.
We can assume that the SNB will only increase rates if there is a major change in its economy.
The worst times to enter a carry trade position are during periods of high volatility and low liquidity.
This could range from one afternoon (Fridays) to an undetermined amount of time during political uncertainty or wars.
Here are some specific times to avoid carry trading:
When a country is about to make a significant economic announcement, the markets tend to be sharp and unpredictable.
It’s best to avoid carry trading at these times, as well as during central bank meetings.
Carry trading during elections can be particularly risky. The market often experiences volatility and uncertainty during election season.
New leaders often implement new policies, and investors usually adopt a wait-and-see approach.
During times of political uncertainty (and even wars), the market can be very unpredictable. It’s best to avoid carry trading currencies of conflict countries.
By avoiding these periods, you can reduce the risks of losing money from carry trades.
In our next lesson, we’ll get more technical about choosing currency pairs to carry trade.
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