7.17 Strategy 17: The Carry Trade (Fundamentals)

So far, every strategy we have discussed relies on Technical Analysis (staring at charts). But what do the multi-billion dollar hedge funds do? They rarely look at 15-minute charts. They trade based on Fundamentals (the underlying health of a country's economy). The absolute most powerful fundamental strategy in the world is The Carry Trade.

When you buy a currency pair like USD/JPY, you are literally buying the US Dollar and simultaneously selling the Japanese Yen. Because you are holding currencies, you are subject to the Interest Rates set by the Central Banks of those countries.

If the United States Federal Reserve has an interest rate of 5.5%, and the Bank of Japan has an interest rate of -0.1%, there is a massive 'Interest Rate Differential' of 5.6%.

The Magic of the Carry Trade: If you BUY the USD/JPY, your broker will literally pay you that 5.6% difference directly into your trading account every single night at 12:00 Midnight. This payment is called Positive Swap. You are getting paid passive income just for keeping the trade open, regardless of whether the chart goes up or down.

1. The Research: Go to a financial website like ForexFactory. Look at the Central Bank Interest Rates for all major countries. Find the country with the highest rate, and the country with the lowest rate.
2. The Chart Confirmation: Open the Weekly (1W) chart for that specific currency pair. Because of the interest rate difference, millions of investors will be buying it, meaning the chart should naturally be in a massive uptrend.
3. The Execution: You do not use a tight Stop Loss. You buy a very small lot size, place a massive 200-pip Stop Loss, and you hold the trade for 6 months to a year. You collect thousands of dollars in passive Swap payments, while simultaneously profiting from the long-term uptrend.

WARNING: If you sell the pair instead of buying it (e.g., Sell USD/JPY), you will be charged 'Negative Swap'. The broker will steal that 5.6% from your account every night. Never trade against the central banks.