Where Can I Invest to Get Higher Interest Rates?
When traders mention profits from interest, they refer to a specific system known as carry trade. It allows you to borrow one instrument to buy another, capitalizing on the difference in rates. Learn more about carry trading in our article and see if the strategy is best for you.
A Different Look at Forex Trading
Buying low and selling high is not the only way to make money in the Forex market. It may get stressful, particularly if you are a scalper making quick decisions all day long. Emotional and intellectual fatigue are common.
Fortunately, hectic action is not the only way to make a profit. In swing trading, a position may be open for days or weeks. Some position traders are happy with a few trades per year. However, the carry trade is still fundamentally different.
It is not a variation of buy low/sell high. Your profit is not the difference between Ask and Bid. It is derived from the interest differential. You borrow one asset at a low rate and invest in another one whose rate is higher. The logic is similar to the following hypothetical situation.
Suppose you have a credit card with low interest. You use some borrowed cash to invest in financial instruments (for example, stocks). If the yield of these assets is higher than the cost of borrowing, you make a profit. Otherwise, you make a loss.
What Pairs to Trade
So, which Forex pairs are the most suitable? Obviously, you need a combination with a favourable differential — i.e., the gap between interest rates. However, it is not the only consideration. Search for the following types of price dynamics:
- The pair has been stable for a while.
- The pair has been growing in favour of the higher-interest currency.
Either condition let you keep a position open as long as possible and make money off the differential. However, remember that political and economic events influence the market daily. They also affect interest rates and the gaps between them. As a result, some popular carry trades may fall out of favour.
What Software to Use
Carry trade is supported by popular trading terminals like MetaTrader 4 and MetaTrader 5. Both are offered by brokers in Africa, but be cautious to avoid fraud. In Nigeria, market regulation is almost non-existent.
Trust only regulated firms with official licenses and transparent registration status. For example, Forextime Nigeria has been approved by monitoring entities in several jurisdictions. The company has licenses from the FSCA in South Africa, the FCA in the United Kingdom and the CySEC in Cyprus. Forextime also provides negative balance protection, so even with the most awful strategy you never go into debt.
Carry Trade Indicators
Users of MetaTrader 4 and MetaTrader 5 may choose from hundreds of Expert Advisors, also known as Forex robots. Some of them are designed for carry trade. Here is an example.
Buy an MT4 indicator that allows you to monitor interest rates (or swap fees) paid to your broker on every trade. The software will make the following calculations:
- Received or paid interest amounts (net),
- Interest yield (net),
- The annual rate of return,
- ROI (for your margin amount),
- The broker’s interest rate fee (spread).
So, what happens when you apply this indicator to a chart? You see the interest cash flows for both directions of the position (long for buying and short for selling). The system also displays current rates of interest for all symbols in your market watch section. Meanwhile, the average interest rates spread of the provider is calculated and also shown for comparison.
Carry Trade Tips
Carry trade may be used in less than perfect economic conditions. What really matters is the outlook. If the prospects are bleak, nobody is going to expose themselves to higher risk. When investors are fairly bold (i.e., willing to take on more risk), this strategy is feasible.
If risk aversion is high, you cannot succeed. Investors are reluctant to purchase currencies with a higher yield. They prefer safe havens — something stable and predictable like gold. In the currency market, they prioritize options with low-interest rates like the Japanese yen or the American dollar.
The Bottom Line
So, what is the upshot? Choose combinations with the highest differential and look for positive dynamics. Like any other strategy, carry trade requires you to calibrate risk. Remember to limit your losses like you would with any regular strategy. When applied properly, carry trade may bring substantial profit along with other trading styles.