Carry Trade For Newbies

Here is a weekly chart of the aud/usd. 

A long position in this pair will pay you daily interest. The interest rate that you recieve depends on your broker. The rate for AUD is 7.50%. The rate for USD is 3.00%, and going lower, most likely. The weekly chart clearly shows a strong uptrend. Some analysts are predicting parity in the future for this pair, meaning that we may see the 1.00 level and above in the future. Aud is a commodity currency, and is correlated to the price of oil, gold, and crops, etc. Any rise in the commodities is bullish for aud/usd. Market sentiment is bearish USD for now. Investors do not want to own USD based positions at present. This is powerful information. We can exploit it to our financial gain, in various ways. One of the methods available to us is to own the AUD against the USD. With the chart telling us that there is upside potential to owning a long position on this pair, logic tells us to buy it (cheap) and hold it long term until we see a reversal. Therefore we stand to gain substantial profit from any rise in this pair to 1.00 from where it is now trading, in addition to daily interest earnings. Our strategy is to find a strong entry and ride it to resistance, or to ride it to our target of 1.00.

Looking at the weekly chart, we see many things.  Note the price action in relation to the moving averages. We see the Zigzag indicator (aqua color) showing 3 waves up from  .7673 price (aug 12, 2007) to a high of .9405 (feb 4, 2008). The 3rd wave up has surpassed the 1st wave up, making a higher high. This is bullish. Price closed above the 5 sma high. This also is bullish. But we also see wicks on the tops of the last 3 candles. Each of these candles represents a one week trading period. I have drawn a red horizontal line to show where this pair will break out or reverse. It has tested this level 3 times, and will need a candle close above it to resume the uptrend. Entries near this price level will get stopped out on retracements downward. Ideally, we want a retrace down to support, and enter long at the bottom, after a rejection is confirmed. A low risk to high reward position begins at support. Long term support is a lot more stable than short time frame support. I have drawn additional red horizontal lines that provide illustrations of good entry points. Price has been rejected previously at these red lines, and that tells us that it will be so in the future also. On the weekly chart, the 5 sma is powerful support/resistance. Set up your chart to show the 5 sma high, low, open, and close. Drag and drop from the indicator list using the simple moving average. This weekly candle closed barely above the 5 sma high after a volatile week. Notice the size of the wicks above and below the candlestick. This tells us that there was movement in both directions and a tight stop loss would be taken out. It also tells us that the pair is consolidating its gains before pushing further upward in the future. But it may retrace down first in order to gain the momentum needed to break strong resistance. Our strategy calls for a buy on dips, with a tiny lot size that can withstand a larger drawdown. This is called a “tester” position. We let it run and collect the daily interest until the uptrend is finished. The cheaper the entry price, the better, of course. Look to buy at areas of former rejections. If the position moves against you, you still collect the daily interest, and because the position is tiny, the drawdown won’t hurt your balance, with proper MM. Add a second tester if you get a cheaper price. Continue building tester positions on each dip, and gradually you will have a solid investment. When the upside break out occurs, expect a retrace immediately afterward, then a resumption of trend to test the previous highs. Look for higher highs to be formed on the 4 hour, daily, and weekly chart for a heads up. Move your stop loss to +1 pip when the position becomes profitable. Then forget about it. Dont ever touch it again. Let the market do all the work for you. A strong retrace down will stop you out at +1 pip with interest. It has become a no risk position. If you get stopped out, simply add another tester at the new support zone, and begin collecting daily interest again.