What is a Currency Carry Trade and How to Profit From It
Published on Apr 10, 2016
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What is a Currency Carry Trade and How to Profit From It
What is a Carry Trade?
What is a Carry
- Essentially a currency carry trade can be done in the forex markets by borrowing a currency with a low interest rate and using that to finance the purchase of a higher yielding currency
How Carry Trading Works
- If the price of the pair stays the same during the time you are in the forex carry trade, you will earn an interest profit.
How Carry Trading Works
- If the price of the pair moves in your favor during the time that you are in the carry trade, then you will have earned interest profit along with the capital appreciation of the currency pair.
How to Calculate Carry Interest
- Daily Rollover Interest Credit / Debit = Contract Notional Value x ( Base currency interest rate – quote currency interest rate ) / 365 days per Year x Current Base Currency Rate
How to Find Good Carry Trade Pairs
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What to Look For
- Consider the financial stability of the countries for which we are looking to put on a carry trade.
- Compare the interest rate differentials among the currency pairs.
Popular Pairs
- Some of the more popular pairs for carry trades are the AUDUSD, AUDJPY, NZDUSD, and the NZDJPY.
- They represent currencies from stable economies with the highest interest differential ratios
Buy and Hold Carry Strategy
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Buy and Hold
- With the Buy and Hold strategy, you will simply buy the selected positive carry pair and hold it for a fixed period of time. It could be 3 months, 6 months, 1 year or longer.
Basket Buying Carry Strategy
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Basket Buying
- Using this concept we could purchase a basket or portfolio of carry trade positions
Carry Trading with Technicals
- A Technical trader could utilize a trend following technique to get in on these trades.
- In addition a swing trader could wait for pullbacks and dips to enter and add positions while prices are moving in their favor.
Be wary of utilizing counter trend strategies on pairs that have a strong carry.
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