By selling currencies whose country has a lower interest rate against currencies whose country has a higher interest rate, you can profit from the interest rate differential (known as a carry trade) as well as price appreciation.
That’s like being able to get a frosted cupcake with sprinkles on top! That talks to you! Imagine how delicious that would taste!
Currency crosses offer many pairs with high interest rate differentials that are prime for these types of trades.
For example, take a look at the nice uptrend on AUD/JPY. If you had a long position on this pair, you would’ve made a hefty profit.
On top of that, the interest rate differential between AUD and JPY was huge.
From 2002 to 2007, the Reserve Bank of Australia had raised rates to 6.25% while the BOJ kept their rates at 0%.
That means you made profits off your long position AND the interest rate differential on that trade!
Now that’d be an awesome cash cow right there!
Later on in college (if your brain hasn’t exploded with all this forex knowledge by then), we’ll teach you more about carry trade.
We’ll teach you which ones will work and which ones won’t.
We’ll even teach you about a lil’ something called risk aversion. But that’s for a later lesson.
Reprinted from Babypips，the copyright all reserved by the original author.
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