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.Carry trading allows foreign exchange traders to receive sub-stantial interest payments on a daily basis for holding high-interestpositions open.Of course, the risk of adverse price moves canpotentially erase all of those daily interest gains, and then some.But with the help of a high probability carry trading strategy (asdescribed next) and solid risk controls, trading exclusively in thedirection of positive interest yield is one of the most prudent andsensible ways to trade long-term positions in forex.180 Car r y Tr adi ng I n t he I nt er est of I nt er estTI PS AND TECHNI QUESThe Technical Carry TradeA variation on traditional buy -and-hold carry trading incorporatesthe intelligent use of technical analysis.This method is aptlynamed, Technical Carry Trading.What sets this approach apartfrom traditional carry trading is its strict trade entry criteria thatscreens out low -probability carry trades where price has alreadyover-extended itself.Technical carry trading is a simple strategyfor optimizing trade entries/exits that decreases exchange raterisk and maximizes potential exchange rate profi t, while also tak-ing advantage of daily interest payments based upon the tradi-tional carry trade model.The principle behind technical carry trading is that the high-est probability strategic entries into long -term carry trade posi-tions are near long -term support/resistance levels.Therefore, ifa substantial positive interest rate differential can be achievedby buying (going long) a currency pair (as in the example of NZD/JPY), the highest probability entry would be near long -term sup-port.When price on the pair is near long-term support, the histori-cal probability is that price should eventually rise.On the fl ip side,if the positive interest differential can be attained by selling shorta currency pair, the highest probability entry would be near long-term resistance.The fi rst step in technical carry trading is to identify thosecurrency pairs that have a high enough interest rate differentialto warrant holding a long-term carry position.The threshold mightbe set at around 300 basis points (or 3 percentage points) ormore.Perhaps more importantly, however, the likely future direc-tion of the rate differential should be examined, as this willaffect the exchange rate outlook of the currency pair enormously.The future direction of interest rates can be analyzed through cen-tral bank statements, economic conditions, the infl ation outlook,181 For ei gn Exchange Tr adi ng Met hods and St r at egi esTI PS AND TECHNI QUES (CONTI NUED)and other fundamental analyses of the countries/regions inquestion.After screening currency pairs according to the current andpotential future interest rate differentials, the second step in thetechnical carry trade process is technical selection.Of the cur-rency pairs chosen in the fi rst step, the trader might choose totrade only those pairs whose current price is in the bottom one-third of their long-term vertical range (near support).Or, if a pair isentrenched in a long-term uptrend channel, the trader may chooseonly to enter long when price is near the bottom of the channel(again, near support).The primary principle here is to trade onlywhen price is in a high-probability location, like near support whengoing long or near resistance when selling short.The last step in the technical carry trade process is tradeexecution.In order to spread risk and avoid the need to pin-point entries, technical carry trading may employ a scaled entry-approach.This involves entering into a long-term carry trade usingmultiple fractional entries.These smaller positions would bespaced evenly within a support/resistance trading zone (as in thebottom one -third of a long -term range) in order to distribute riskacross a wide price region.Exits in the form of profit limits andstop losses would be technically based.If a long carry trade isentered near support, the profi t target could be placed near resist-ance (e.g., the top one-third of the long-term range).Stop losseson a long carry trade could be placed somewhere right below long-term support, much like with other types of technical trades.Technical carry trading is all about increasing the chances ofa profi table trade while simultaneously earning substantial lever-aged interest.Since good trading, in general, involves maximiz-ing probabilities under precarious circumstances, the technicalcarry trade strategy performs its function well.At the very least,it improves the outlook of the traditional carry trade dramatically.182 News Tr adi ng Al l t he News That ' s Fi t t o Pr of i t Fr omNews Trading All the News That s Fit toProfit FromLike carry trading, news trading also falls under the general cate-gory of fundamental analysis.News trading is simply the attempt toexploit immediate market reactions to major news and economicdata announcements.Many forex news traders will wait patiently before each majornews announcement (as described in Chapter 4), ready to pounceon a trade if the opportunity presents itself.These traders often willhave already memorized the consensus (expected) numbers, andwould then just wait to see if the actual numbers announced on theirup-to-the-second news feed differ considerably from the consen-sus [ Pobierz całość w formacie PDF ]