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 daysper Year x Current Base Currency Rate

How to Find Good Carry

Trade Pairscc: Joshua Daniel O. - https://www.flickr.com/photos/74642755@N00

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

Forex Carry Trade Strategies

cc: Mukumbura - https://www.flickr.com/photos/11738433@N03

Buy and Hold Carry Strategy

cc: JustinJensen - https://www.flickr.com/photos/40845011@N03

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

cc: 401(K) 2013 - https://www.flickr.com/photos/68751915@N05

BASKET BUYING

• Using this concept we could

purchase a basket or

portfolio of carry trade

positions

Carry Trading with Technicals

cc: 96dpi - https://www.flickr.com/photos/67499195@N00

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.cc: lindsayshaver - https://www.flickr.com/photos/33291250@N06

Check Out the “IN DEPTH”

Blog Post on this Lesson