Summary on carry trade

Forex Carry Trade Summary is an overview of all covered in Rollover and carry trade lessons.

All in all,

Carry trade is borrowing/selling financial assets with lower interest rates to finance those with high interest rates.

The profit is from interest differentials.

It is applicable in securities, commodities and currency.

For example,

If you buy NZD/JPY .  This means you are buying NZD while selling JPY.

When holding a position, you pay interest for the currency you are selling and at the same time receive interest for the currency you are buying.

Your profit is the difference between the interest rates of the two currencies.

When the difference is positive it becomes a positive carry and when it is negative it becomes a negative carry.

Types of forex carry trade summary

Positive forex carry trade

This involves borrowing a currency with a low interest rate and buying a currency with a high interest rate.

Here you hold trade to benefit from the interest differential whether it appreciates or stays on the same value

Negative forex carry trade

On the other hand,

The negative carry is borrowing a currency with a high interest rate while buying a currency with a low interest rate.

In this case, you expect the lower interest currency to appreciate relative to the higher interest rate currency after taking a trade.

Carry trade does not only benefit from interest rate differentials but also from currency appreciation.

While choosing currency pairs to trade, you should not only consider the highest interest differentials but also the current market conditions.

You should also consider a stable pair that is in favor of an uptrend for the currency with high interest rates.

When does carry trade not work

Carry trade does not work best when investors are in fear of losing their money.

Or when the country’s central bank cuts down the interest rate.

This gives a clear sign to investors that the country’s economy in question is either not doing  well or its future prospects may turn out not as expected.

Carry trade can only profit when you hold a trade for a long time.

That is more than one day to a month or a year.

Rollover and swap

The cost of holding a currency pair/a trade for more than one day to profit from carry trade is rollover/swap.

Rollover is the process of moving open positions from one trading day to another. A rollover is carried out only on positions kept open after 5pm EST, (pm GMT).

The market opens at 5pm and closes at 5pm.

A swap is the interest fee that is either paid or charged to you at the end of each trading day.

A swap rate = carry trade+rollover costs+ any commissions by the broker.

Before entering a carry trade;

• Find a pair with the highest interest rate differential.
• It move in an uptrend for the currency with the high interest rate.
• Study the current economic conditions in the countries in the pair and relate to fundamental and technical analysis.
• Also check your position size and money management principles

Good luck while trading.