When Do Carry Trades NOT Work?

On the other hand, if a country’s economic prospects aren’t looking too good, then nobody will be prepared to take on the currency.

Especially if the market thinks the central bank will have to lower interest rates to help their economy.

To put it simply, carry trades work best when investors have low risk aversion.

Carry trades do not work well when risk aversion is HIGH (i.e. selling higher-yielding currencies and buying back lower-yielding currencies).

When risk aversion is high, investors are less likely to take risky ventures.

Let’s put this into perspective.

Let’s say economic conditions are tough, and the country is currently undergoing a recession. What do you think your next-door neighbor would do with his money?

Your neighbor would probably choose a low-paying yet safe investment then put it somewhere else. It doesn’t matter if the return is low as long as the investment is a “sure thing.”

Finding yield is not the priority anymore. preserving principal is.

This makes sense because this allows your neighbor to have a fallback plan in the event that things go bad, like if he loses his job.

In forex jargon, your neighbor is said to have a high level of risk aversion.

The psychology of big investors isn’t that much different from your next-door neighbor.

Risk aversion refers to when traders unload their positions in higher-yielding assets and move their capital in favor of safe-haven currencies.

This normally happens in times of uncertainty.

When economic conditions are uncertain, investors tend to put their investments in safe haven currencies that offer low interest rates like the U.S. dollar and the Japanese yen.

This is the polar opposite of carry trade. This inflow of capital towards safe assets causes currencies with low interest to appreciate against those with high interest.

Learn to Day Trade Forex

If you’d like to earn extra income trading on the Forex market, consider learning how to currency trade with Forex Smart Trade.   With their super-accurate proprietary trading tools and best-in-the-business, personalized one-on-one training, you’ll be successful.  Check out the Forex Smart Trade webinar.  It shows one of their trader’s trading and how easy, intuitive, and accurate the tools are.  Or try the Forex Smart Trade 14-day introductory trial for just TEN dollars.

Currency trading is very risky. My results are not typical. We provide a trading trial so you can assess the value of our indicators and tools for yourself.

www.ForexSmartTrade.com/register