💰 What is Carry Trade?
Carry trade involves buying a high-yielding currency and selling a low-yielding currency, profiting from the interest rate differential (swap rate) while holding the position. It's ideal for position traders who hold trades for weeks or months.
Introduction to Carry Trade
Carry trade is a long-term strategy that profits from interest rate differences between currencies. Traders earn daily swap payments for holding positions overnight, making it attractive for position traders and swing traders.
Why Use Carry Trade?
- Passive Income: Earn daily swap payments
- Long-term Profits: Can accumulate significant returns over time
- Trend Following: Works well with trend following
- Lower Stress: No need to watch charts daily
- Compounding: Swap payments can compound over time
How Carry Trade Works
The Concept
- Buy High-Yield Currency: Currency with high interest rate
- Sell Low-Yield Currency: Currency with low interest rate
- Hold Position: Keep position open overnight
- Earn Swap: Receive daily interest payment
- Profit from Both: Swap income + potential price appreciation
Example
- AUD/USD: Buy AUD (high yield) vs USD (low yield)
- Daily Swap: Earn positive swap for holding long position
- If AUD Appreciates: Profit from both swap and price movement
Best Currency Pairs for Carry Trade
High-Yield Currencies
- AUD (Australian Dollar): Typically 2-4% interest
- NZD (New Zealand Dollar): Typically 2-5% interest
- ZAR (South African Rand): Typically 5-8% interest
- TRY (Turkish Lira): Typically 10-20% interest (high risk)
Low-Yield Currencies
- JPY (Japanese Yen): Typically 0-0.5% interest
- CHF (Swiss Franc): Typically 0-1% interest
- EUR (Euro): Typically 0-2% interest
Popular Carry Trade Pairs
- AUD/JPY: High yield vs low yield
- NZD/JPY: High yield vs low yield
- AUD/USD: Moderate carry
- EUR/TRY: High carry (high risk)
Carry Trade Rules
Entry Setup
- Identify High-Yield Pair: Currency with significant interest differential
- Check Swap Rates: Confirm positive swap for long position
- Confirm Trend: Use trend following to enter
- Enter Long: Buy high-yield currency
- Hold Position: Keep open for weeks/months
- Monitor: Check periodically for trend changes
Exit Strategy
- Trend Reversal: Exit if trend reverses
- Swap Changes: Exit if swap becomes negative
- Risk Management: Exit if risk management rules triggered
- Profit Target: Exit at predetermined profit level
Calculating Carry Trade Returns
Daily Swap Calculation
Formula: (Interest Rate Differential / 365) × Position Size
Example:
- AUD/JPY: 3% annual differential
- Position: 1 standard lot (100,000 units)
- Daily Swap: ~$8-10 per day
- Monthly: ~$240-300
- Annual: ~$2,880-3,600
Total Return
Total Profit = Swap Income + Price Appreciation
Risks of Carry Trade
1. Currency Depreciation
Risk: High-yield currency loses value Impact: Can wipe out swap gains Mitigation: Use risk management and stop losses
2. Interest Rate Changes
Risk: Central banks change rates Impact: Swap rates can reverse Mitigation: Monitor central bank policies
3. Market Volatility
Risk: Sudden market moves Impact: Large losses possible Mitigation: Use proper position sizing
4. Leverage Risk
Risk: Leverage amplifies losses Impact: Can lose more than deposit Mitigation: Use conservative leverage
Best Timeframes for Carry Trade
Position Trading
- Primary: D1, W1
- Hold Time: Weeks to months
Swing Trading
- Primary: H4, D1
- Hold Time: Days to weeks
Carry Trade Checklist
Before entering a carry trade:
- [ ] High-yield currency pair identified
- [ ] Positive swap rate confirmed
- [ ] Trend direction confirmed (use trend following)
- [ ] Interest rate differential significant (2%+)
- [ ] Central bank policy stable
- [ ] Stop loss set (protect against depreciation)
- [ ] Position size calculated using risk management rules
- [ ] Long-term holding plan (weeks/months)
Advanced Carry Trade Techniques
Multi-Currency Carry
Diversify across multiple high-yield pairs:
- AUD/JPY
- NZD/JPY
- EUR/TRY
Benefit: Diversification reduces risk
Carry Trade + Trend Following
Combine carry trade with trend following:
- Enter: On trend confirmation
- Hold: For swap income
- Exit: On trend reversal
Common Carry Trade Mistakes
- Ignoring Price Movement: Only focusing on swap
- No Stop Loss: Not protecting against depreciation
- Wrong Timeframe: Using short-term charts for long-term strategy
- High Leverage: Using excessive leverage
- Ignoring Central Banks: Not monitoring rate changes
When Carry Trade Works Best
Ideal Conditions
- Stable Interest Rates: Central banks maintain rates
- Strong Trends: High-yield currency appreciating
- Low Volatility: Stable price action
- Long Timeframes: Weeks to months
Avoid Carry Trade When
- Rate Uncertainty: Central banks changing rates
- High Volatility: Unpredictable movements
- Weak Trends: Currency depreciating
- Short Timeframes: Days or less
Summary
Carry trade is a powerful strategy for earning passive income from interest rate differentials. Success requires proper pair selection, trend confirmation, and strict risk management.
Key Takeaways:
- Buy high-yield, sell low-yield currencies
- Earn daily swap payments
- Hold positions for weeks/months
- Combine with trend following
- Always use stop losses
- Monitor central bank policies