Hedge fund managers will try to get their stop losses to break even and they will leave them there for as long as possible. Remember, they want the interest. As long as the price is above their stop loss, they will get paid interest every day regardless of what the market does. This is why a carry trader wants to stay in the trade as long as possible. You can set it and walk away.
Because carry traders are long-term investors, it is very common to get your trades up many hundreds of pips ... if you’re lucky, even thousands. However, as reassuring as this may first appear, at some point you’ll get more scared about the pips and forget about the interest.
You’ll tell yourself, “Who cares about the interest? If I cash out now, I’ll have earned more money in pips that I could make in many months of collecting interest payments. Why not get out now?” This is extremely common at certain psychological levels, such as 250.00 was for GBP/JPY.
This is how carry trades become vulnerable. It’s common for a snowball effect to take place. Some traders are worried about a psychological level and react emotionally by taking profit. This reverses the equation and the JPY gains some strength.
Then the technical traders see the pullback at the psychological level and some of them take some profit ... more JPY strength is created.
All of a sudden, the floor drops and the carry trades collapse all at once like a house of cards. More traders cut out, then more, then even more. Suddenly ...