Every trader eventually learns the concept of carry trades and masters its application. The concept is simple, you borrow cheap money to invest in higher-interest money. In other words, you buy a currency with high interest rate (like NZD) and sell one with lower interest rate (like JPY). When the market is stable, you can earn interest income based on the difference in interest rates between the two currencies. When the market faces certain risks, the reverse trend called “carry trade unwinding” will happen. Big banks seem to apply this concept to the full extent that effectively drive price actions. For example, the pairs NZD/USD and EUR/JPY had been increased significantly over the past few months, until just last week, when carry trades started to unwind. Just over the weekend alone, EUR/JPY dropped 300 pips while NZD/USD also fell more than 100 pips even though there were no news releases.

I’m not sure if any retail forex traders could profit from “Interest rates” alone, it’s just not practical. The daily interest income/loss would be too minor compared to price action for any currency pair. But one thing I have found to be very useful to my trading strategies: determining the trend. How can that be done? Well, in the absence of any considerable risk events, you’ll know carry trades are favored. As such, traders tend to go for higher-interest money.  When the market presents more risk (like pending interest rate decisions, geopolitical events), you’ll know the reverse trend may be under way. Now, the practical question is “how would you know WHEN it’ll happen?” Well, things rarely take traders by surprise. You’ll see discussions everywhere on economic news and forums. Even an amateur like myself can easily spot changes in forex fundamentals.

Finally, my thought is that a wise trader must utilize others’ expertise to his advantage, instead of spending too much time to dig into details by himself. Specifically, novice traders must learn how to use available analyses on creditable forex sites to assist with trading decisions. Although no one can ever be right all the time, these experienced traders’ analyses can be great input for an individual trader to decide his/her trades.