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Chapter 26, Part II. Should We Rely on Carry Solely? Page 8

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Risk of carry

    For forex traders risk controlling procedure is almost the same as for any trade – you want to exit when it appears that your view has become wrong. The major difference is just in scale. Since positions that usually being opened for carry is long term, the stop loss orders also will be farther and risk in terms of pips will be greater. Long-term investment suggests earnings from a long term move. At the first view, this move looks outstanding – 4.5K pips on AUD/USD for 5 years. When you will divide it on time you’ll get 900 pips per year, but surplus farther stops and, as a consequence – lower margin that leads us to lower return in percents.

    Don’t be deceived by absolute numbers. Since you invest long-term, your way of thought is in percents. Think in terms of return on investments – total assets, margin with potential stop loss. If you’ll get 15-20% annually on total assets during 5 years at small, say 1:5-1:10 leverage or even lower – this will be an excellent result, and carry will add significant amount of profit.

    And the way to control risk is simple – logical stop-loss order. Logical means that it has to be placed in such place, that you will be 100% sure that you were wrong, if the market will hit it.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
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