How do you think traders often profit from the forex trading market? In other words, what strategies help them achieve this goal? Both highly professional traders and even beginners know how effective a carry trade forex strategy can be. But what is a carry trade in forex, and why is it so popular?
The truth is, forex carry trading is one of the most popular and time-tested approaches in the entire trading field. It is widely used by traders, especially experienced ones. So, if you’re here to learn what a carry trade in forex means and why it is so loved by traders, you’ve come to the right place.
This comprehensive guide will explain everything you need to know about the forex carry trade strategy, from the basics and how to carry trade, to the best currency pairs. Read along to know everything about the carry trade definition in forex.
What is Carry Trade in Forex?
So, what is a carry trade in forex? To keep it clear and short, a carry trade is a forex strategy where traders (both professionals with large portfolios and beginners with smaller ones) borrow a currency with a low interest rate (called the funding currency) and use the borrowed money to buy a currency with a higher interest rate (called the target currency).
Wondering how they profit from this action? Well, traders profit from the difference in interest rates between the two currencies, also known as the interest rate differential.
Let’s break it down even more simply: When you borrow money at a low cost and invest it where you can get a higher return, you make a profit from the difference. In carry trading in forex, the “return” comes from the interest rates set by central banks. If the interest rate is higher on the currency you buy than the one you borrow, you earn the difference (often daily) as long as you hold the position.
Traders also hope that the currency they bought will appreciate against the currency they borrowed, adding capital gains to their overall returns. Simply put, they see it as a double victory if everything goes as planned.
How Does the Forex Carry Trade Work?
Need to know how forex carry trade works? We’ve got a step-by-step guide to help you understand everything in a way that leaves no questions unanswered.
- Identify the Interest Rate Differential: Finding two currencies with a clear interest rate difference should be your top priority. Make sure to choose a pair where one currency has a significantly higher interest rate than the other.
- Borrow the Low-Interest Currency: After identifying the right currency pair, borrow the funding currency, AKA the one with the lower interest rate.
- Buy the High-Interest Currency: After the second step, you can use the borrowed low-interest currency to purchase the target currency, or the one with the higher interest rate.
- Hold the Position Overnight: You keep the position open overnight to receive daily rollover interest payments. This is sometimes called the “rollover” or “swap” in forex carry trades.
- Close the Trade: When you decide your forex carry trade has run its course, exit the trade by converting the currencies back. Ideally, if the target currency is appreciated against the funding currency, you’ll have earned the interest rate differential plus any additional profit.
Why Is Carry Trade in Forex Popular?
The popularity of the carry trade lies in its ability to generate steady, passive income through interest payments, especially in low-volatility markets where price fluctuations are minimal.
Unlike some other trading strategies in forex that rely on price movements, forex carry trading focuses on earning interest differentials, which can be more predictable over time. Simply put, with this strategy you’ll be able to predict forex movement typically in pricing more easily.
However, the forex carry trade strategy is not without risks, which we will cover next.
Forex Carry Trade Risks: What Every Trader Needs to Know
Popularity will never guarantee safety. While the carry trade in forex might be popular and appear profitable, it carries its own risks, something every trader should be aware of.
While the carry trade can be profitable, it carries risks:
- Exchange Rate Risk: If your target currency becomes worthless against the funding currency, losses can exceed the interest profits.
- Interest Rate Changes: Central banks are one of the most unpredictable parts of carry trade in forex. They can suddenly change rates, bringing the interest rate difference closer or turning it around.
- Leverage Risk: Using leverage might be a good idea, but keep in mind that it increases both potential profits and losses.
- Market Volatility: Geopolitical events or economic shocks always affect the forex market. These unexpected events can cause rapid currency moves against your position. One single word from a politician is enough to lose all your investment.
How to Carry Trade Forex?
From what carry trades in forex mean to why they’re popular and how they work, you’ve now warmed up. So, let’s bring it all together with the most important part: how to actually carry trade in forex.
If you want to try the carry trade forex strategy, here’s how to get started:
- Research Interest Rates and Currency Pairs: Make a wise decision on the banks and the currencies you choose. The more you research the better the results. Check central bank websites and financial news to find currencies with favorable interest rate differentials. Remember, fundamental analysis is your best friend when it comes to carry trading in forex.
- Choose a Reliable Forex Broker: As always, choosing the right forex broker is a life or death decision. Look for forex carry trade brokers that offer low spreads, clear swap (rollover) rates, and dependable trade execution. A trusted broker for carry trading makes it easy to see rollover fees and keep transaction costs low. ITBFX offers tight spreads and close to no commissions, all while providing top-quality services to traders with different needs. All you have to do to benefit from these great features is open an account today!
- Use a Forex Carry Trade Calculator: Your calculator of choice for forex carry trading is another factor to keep in mind. Use a forex carry trade calculator to estimate your possible earnings. Swap calculators show you how much interest you could make based on your trade size and the difference between interest rates.
- Open Your Carry Trade Position: It’s best to keep your carry trade position open. Borrow the low-yield currency and buy the high-yield currency to keep your position open.
- Monitor the Trade and Risks: Keep an eye on central bank announcements, geopolitical events, and market volatility. These are the three important aspects that can cause the greatest damage.
How to Start Carry Trade in Forex with ITB
Among everything we have discussed, this one is going to be your most favorite tip. If you’re still unsure about carry trade strategy in forex, ITBFX is going to change your mind.
Choosing the right forex broker is as important as choosing the funding currency, because that’s where your trading journey truly begins. As we mentioned earlier, having a reliable broker by your side gives you peace of mind. That’s why partnering with a trusted platform like ITBFX offers the support and services you need to trade with confidence.
As a trusted broker like ITBFX offers services like:
- Zero fees on deposits and withdrawals,
- Tight and competitive spreads,
- Customizable account types to suit your needs,
- Honest and transparent trading conditions,
- ECN accounts with no swap charges,
- Extensive learning resources and training materials,
- Support available in multiple languages,
- Option to reset your account when needed.
Ready to start carry trade forex strategy? Take your chances with ITBFX.
Forex Carry Trade Strategy: Clear & Short Tips for Success
Last but not least, let’s review some of the best tips for success in forex carry trading.
- Pick Stable Currency Pairs: Avoid pairs with high volatility or political risk.
- Use Leverage Wisely: Leverage can amplify profits but also losses.
- Combine with Trend Analysis: Carry trades work better when the target currency is also trending upward. So, using forex range trading also works really well.
- Diversify: Spread your carry trades across different pairs to avoid any possible losses.
- Manage Risk: Use stop-loss orders and keep position sizes manageable.
Conclusion
The carry trade forex strategy could help you earn a steady income by taking advantage of interest rate differences between currencies. It’s popular among traders who want consistent returns without relying on volatile price moves. However, all your efforts can be undone overnight if you don’t watch the price movements closely and manage the risks of this strategy.
To succeed, understand how carry trade forex strategy works and choose currency pairs with attractive interest rate spreads. Use a trustworthy broker with clear rollover rates and tight spreads. Keep in mind to follow our X account for more updated news.
The goal of a forex carry trade is to earn profits from the interest rate differential between two currencies by borrowing a low-interest currency and investing in a high-interest one.
Pairs like AUD/JPY, NZD/JPY, USD/TRY, and EUR/ZAR are popular due to their interest rate differentials.
Yes, there are risks involved. These include exchange rate fluctuations, unexpected interest rate changes, and overall market volatility, all of which can quickly turn a profitable trade into a loss.
Use a forex carry trade calculator that factors in your position size, interest rates, and holding period to estimate potential profits or losses accurately.
Most brokers do offer carry trade opportunities, but swap rates and rollover policies can vary significantly. So, it's important to choose your broker carefully.
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