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In currency markets, carry trading is done by many investors to take benefit of the basic economic principle that money flows where the returns are high. This constant flowing in and out of capital between the different markets is what makes carry trading profitable.

Carry trading is a popular trading strategy employed by professional forex traders. Hedge funds and investment banks use leveraged carry trading as one of the favorite strategies. Retail forex traders can also benefit from carry trading.

Carry trading means taking benefit of the interest rate difference between two currencies. Carry traders take benefit of the interest rate differential between two currencies by buying or going long on the high interest rate currency and selling or going short on low interest rate currency.

Lets make it clear with a simple example: suppose New Zealand dollar is offering an interest rate of 4.75% while the Japanese yen is offering an interest rate of 0.25%.

An investor who wants to capitalize on this interest rate differential will buy New Zealand dollars (NZD) and sells Japanese Yens (JPY). The investor can earn a profit of 4.75-0.25=4.5% as long as the NZD/JPY exchange rate does not change. If the investor uses a leverage of 10:1, this 4.5% return will be magnified into 45%.

If the currency pair NZD/JPY appreciates, the investor can get a capital gain as well as a yield on the investment. When there is a carry trade opportunity, many investors jump on the bandwagon. The more investors carry trade, the more the currency pair appreciates.

It depends a lot on the mood of the investors as a group. If investors as a group have low risk aversion, carry trading will be profitable. But if the investors as a group suddenly develops high risk aversion, carry trading will become unprofitable.

When an investor enters into a carry trade, an investor expects to profit from an interest rate difference between a currency pair. But in case, low interest currency appreciates considerably for different reasons, carry trade will become unprofitable.

So it essential when you determine a currency pair for carry trading, you also identify the current trend of the currency pair to see whether it is moving in the right direction.

MACD (moving average convergence divergence) indicator can help you in this regard. You should enter the trade when MACD crosses the zero line from below. You should exit the trade when it crosses the zero line from above.

Learning forex trading should not be difficult. With decent understanding of money management rules and a good trading strategy, you should be ready for conquering the forex markets.

You should always try to understand the big picture. You should start each trading session by looking at the daily charts. After looking at the daily charts zoom into 4hr, 1hr, 30min, 15 min etc charts. Forex trading is about interpreting the past price action as well as about interpreting the future price action.

You need to ask: Is the market ranging or trending before each trade. You should ask: Is there any long term patterns that have developed. By taking a general look at the different charts you will develop a general understanding of how the forex markets are behaving in the short as well as the long term.

Figuring out the general direction of the currency markets is easy. Candlestick analysis and moving averages are a good way to identify long term patterns and reversals.

Bollinger bands applied to 4hr charts can be used to identify the daily trading range. Most of the price action is expected to be within the Bollinger bands. Any moves outside the bands can be viewed as short term abnormalities and ignored.

You need to do some scenario planning for each day, once you have a general overview of the market for that day. You should know what fundamental news is scheduled to be released for that day and how the markets are expected to react.

Understanding the big picture does not mean that you should know the whole picture. Try to focus on your favorite pairs. It takes a lifetime to understand a currencys behavior, how it reacts to things like oil prices, interest rates etc. So concentrate only on a few pairs and stick with them.

You should always try to take notes and keep a daily trading journal. Start each entry in the trading journal by analyzing the general direction of the markets for that day. What you think how the markets are going to react to different news that is expected to be released that day? What should be your entry and exit for the trade. How many pips you are expecting to make?

After each trade, analyze what went wrong and how to avoid it in future! In case of a good trade, analyze how many pips you could have made more and how to tweak your trading strategy for better results in the future trades.

Keep these general tips in mind while you are learning forex trading. Always remember never ever trade without stop losses and practice on the demo account for at least three months.

The question is can anyone become a winning forex trader? Yes anyone can in my opinion. The only thing that is required is a winning trading plan. If you have not developed a good trading plan than dont enter the forex market. First develop one. Forex markets are not going anywhere. These markets will be there next year and after that. Enter only when you are prepared.

There was a great experiment conducted in trading history. This experiment is a perfect example of how a winning trading plan can help you become a great trader. Interested, then read on about the Turtle Trading Experiment.

Richard Dennis and Bill Eckhardt were two partners, great traders and commodities speculators. Both were arguing one day in the year 1983 whether great traders were made or were born.

Richard had the opinion that great traders could be made through good training while Bill argued that great traders were only born. They could never be made. To clinch the argument, Richard suggested that they select and train a few traders to see how they perform after the training.

The Great Turtle Trading Experiment in history was born that day. An ad was placed in the Barrons, Wall Street Journal and the New York Times. 1000 people applied for the experiment.

Only 13 applicants were selected after shortlisting and interviewing 80. Those selected were known as Turtles.

The students were trained and given a complete trading plan alongwith the rules how to apply it. Richard always would say: I give these rules to anyone. But as long as that person is not consistent in applying those rules no matter how tough the situation, they are useless.

So, the actual success in trading whether forex, stocks, commodities or futures lies in having a good trading plan; You need to have a trading plan that is exact. In other words is mechanical and ruled based does not depend on your emotions. Learn to control your emotions in trading.

After that comes, the discipline to apply that plan in reality. Without discipline and consistency; you can never become a great trader!