Forex Course

193. Summary – Carry Trading


Carry trade involves borrowing or selling of an asset that has a low-interest rate, for the purpose of using the fund proceeds to make another investment with a higher rate of interest. By paying a lower rate of interest on assets and collecting a higher interest rate from another asset, traders make a difference in the interest rate.

Currency Carry Trading – How Does It Work?

In currency carry trading, the trader borrows one currency known as the borrowing fund. And, then they use this fund to purchase another currency. The traders pay low-interest rates on the borrowed currency while collecting a higher interest rate on the purchasing currency. This type of trade gives traders an effective alternative to purchasing low and sell high, which is difficult to do on other trading options. AUD/JPY and NZD/JPY are the most common currency pairs to carry trade.

Opportunities & Risks Involved

The most profitable time to perform a carry trade is when the country’s central banks are increasing or about to raise the interest rate. Low volatility situations are also profitable for these trades as traders are more likely to take more risks. Granted that the value of the currency does not fall, traders are likely to get a good amount.

There is a big risk associated with currency carry trading, primarily because of the uncertainties associated with the exchange rate. When high leverage levels are used in this trade, it implies that even small movement in the exchange rates can result in a substantial loss if the traders fail to hedge their positions properly.

Risk Management 

While lucrative, carry trading comes with its own share of risks. This is because currencies are prone to volatility. Moreover, the negative market sentiment of the traders within the currency market can also have a substantial impact on carry pair currencies. Without improper risk management, traders could end up bearing a high degree of risk. The best way to avoid risk in a carry trade is when the market sentiment and fundamentals support them.

Final Thoughts

If you are looking to invest in a carry trading, the first steps are to select the most lucrative broker vs currency pair combination. The charges of brokers vary significantly across various currencies. Therefore, it is important to ensure that the trade offers an effective risk-adjusted return. Cheers.

Forex Course

191. Carry Trading Doesn’t Work All The Time!


Now that you understand what a carry trade is in the forex market, the next logical step is to show you when this strategy works and when it fails. We already know that the carry trade entirely depends on interest rates between two countries.

Let’s take the USD/JPY pair. The interest rate in Japan is -0.1%, and that in the US it is 0.25%. So, if you were to borrow and sell the JPY to buy the USD, your interest rate differential would be = 0.25 – (-0.1) = 0.35%.

In this case, you’d expect profits of 0.35%. By now, we already know that forex traders always anticipate the monetary policy actions of central banks.

When do Carry Trades Work?

There two main instances when carry trades become popular:

Firstly, it is during periods of low volatility. When there are minimal price fluctuations, traders may be induced to take on more risks to increase their profits – carry trade. In this case, provided the value of the currency doesn’t fall, the rollover earned is a good incentive.

Secondly, it’s when traders anticipate that central banks will raise interest rates. In this instance, traders will anticipate that the interest rate differential will increase, as will the pay-out.

When Do Carry Trades Not Work?

We’ve already established that for a carry trade to be effective, the interest rate differential needs to be high or increasing. That means that one country should be increasing its interest rate while another decreasing.

Similarly, the country with the lower interest rate should be decreasing while the one with the higher interest rate remains constant. Another scenario could be if the country with the lower interest rate remains constant while the one with the higher interest rate increases. If you find all this confusing, let’s explain using an example.

Economic indicators in the US points towards higher possibilities of a recession. Say the unemployment levels are increasing, manufacturing is falling, GDP is contracting, and retail sales are nose-diving.

Forex traders can anticipate that the Federal Reserve will cut interest rates to stimulate the economy. In this case, the USD will be considered a high-risk currency since investors will have a higher aversion towards it. Now, instead of purchasing the USD, investors will opt for other currencies with a more stable outlook.  The logic behind this is that the interest rate differential has reduced or is expected to reduce vis-a-vis USD/JPY.

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Forex Course

190 – Introduction To Carry Trading The Forex Market


When it comes to forex trading, we have so far covered how you can make money by taking advantage of price fluctuations. What, then, do you do when the price of a currency pair remains relatively stable for extended periods? Certainly not nothing! You carry trade.

In the financial market, carry trade means borrowing a financial asset with a low-interest rate, sell it, and purchase another one that pays a higher interest rate. That means the cost of borrowing (lower interest rate) is lower than the proceeds (higher interest rate). In this case, the profits you earn is the difference between the two interest rates, also known as interest rate differential.

For us to explain how the carry trade works, we first need to explain how the interest rate in the financial market works.

Carry Trade Example

Say you go to a bank and take a loan at an interest rate of 2% per annum. If the loan amount is, say, $2000, the interest charged per year would be:

= 2/100 * 20000 = $400

Now, instead of putting the money under a mattress, you decide to buy a corporate bond, which in total, pays a yearly interest rate of 10%. This means that at the end of one year, you should expect interest income of:

= 10/100 * 20000 = $2000

In this scenario, you have earned $2000. Remember, the borrowing cost was $400, which means you have a profit of $1600. In other words, you have earned an 8% in terms of interest rate differential.

If that doesn’t sound like much money, let’s see how you feel when we apply leverage to the borrowing.

Leveraged Carry Trade Example

Say you have a stock portfolio worth $20,000 and put this up collateral for a $2,000,000 loan with an annual interest rate of 2%.

You take this money and invest in another financial asset that pays an annual interest rate of 10%. In this scenario, the interest rate differential is still 8%. How about your profit?

= 8/100 * 2,000,000 = $160,000

With collateral of $20,000, you have made a profit of $160,000. That is an equivalent of 800% return.

Currency Carry Trade

In the forex market, if you let your position stay overnight, you will be charged a rollover fee. The rollover fee is the interest rate differential between the two currencies in the currency pair. Your account will be debited or credited accordingly, depending on whether the interest rate differential is positive or negative.

Stay tuned to learn more about Carry Trading in our upcoming articles.

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Forex Trade Types

What is a Forex Carry Trade?

Many trading strategies or systems that we are familiar with, are based or based on technical analysis or indicators. Unlike these strategies, Carry Trade is a fundamentally based strategy. Carry trade, also sometimes known as a financial bicycle, is a strategy that allows you to take advantage of the existing differential in interest rates of two different currencies.

Although it is a fairly short and simple definition we must have very clear a very important concept of fundamental analysis in Forex such as interest rates. As you know, each currency represents the economy of a country as a whole. All right, interest rates are one of the most important fundamental indicators for analyzing the state of a country’s economy and, therefore, the strength or weakness of its currency.

Interest rates generally set the cost of money, that is, the price we pay for using a certain amount of capital for a certain amount of time. It’s very important for you to know, one of the most important economic news stories that are usually published and affect the price of the currency in question is interest rates.

You should not confuse carry trade with financial arbitration. Arbitrage is a strategy that consists of obtaining an economic benefit by taking advantage of the price difference of a financial asset in different markets. And unlike carry trading, in arbitration, the risk is very low.

Foundations of a Carry Trade

As mentioned above, the spread in interest rates between two currencies offers traders and investors the opportunity to win over the long term. The main idea of any carry trade strategy is very simple: the investor finances or borrows a currency with a low-interest rate (weak economy), sells this currency, and buys another with a higher interest rate (strong economy).

Now, how do we know if an economy is strong or weak? There are several factors that affect interest rates, but inflation or inflation prospects is one of the most important. A strong or solid economy has good GDP growth (Gross Domestic Product) and good employment data, if people consume more goods and services, there is greater demand and inflation increases. To control the increase in inflation and keep it within the target range, the Central Bank of that country has to raise interest rates to limit inflation. By raising the interest rate, the country becomes more attractive for attracting foreign investment and this results in the revaluation or strengthening of that country’s currency.

On the contrary, if an economy is weak or grows very little, has poor data on GDP and employment, consumption of goods or services is low and that country cannot afford to have such a strong currency. The central bank must reduce or keep interest rates very low, thus incentivizing credit since it is cheaper for companies to borrow. As a result, investors will want to take their money to another country with better interest rates by making the local currency devalue or weaker.

Watch this because now countries with the current situation have started to lower rates and print money for free and even the US. that can be considered a strong economy has very low-interest rates. Same situation in Europe with the policies of the European Central Bank.

The Objective of the Carry Trade Strategy

The carry trade has a clear objective: to obtain benefits from the spread of interest rates and not from the variation of prices that can be given during the execution of this strategy. Therefore, benefits can be derived from this strategy, although the price of the currencies involved does not vary by a single pip.

However, as traders, we hope that the currency in which we invest will be strengthened so that by exchanging it for the currency we borrow (we finance) the profit obtained will be greater.

Some Disadvantages of the Carry Trade

One of the disadvantages of this strategy, as you may have already thought, is the risk that the currency in which you buy will be devalued. This is largely due to the fact that the most common practice of a carry trade is to finance or borrow from developed countries with strong economies to invest in debt securities (bond market) of emerging countries with higher yields.

Another disadvantage of this strategy is that there is uncertainty about the maintenance of current interest rates in the future. As a long-term strategy, interest rates tend to vary over the course of the year (in fact we are seeing it recently) and although these variations are small the final benefit will depend on these small variations that can be made by the central bank of each country.

A Practical Example of a Carry Trade

One of the main currencies that traders used to enhance carry trade is the Japanese yen because of its very low (near zero or even negative) interest rates. This has changed because currencies with the euro or the dollar already have very low-interest rates as well. Previously, they borrowed the Japanese yen and then bought or invested in assets denominated in dollars, euros, or other currencies of emerging economies.

Let’s imagine now that we want to carry trade and provide the differential between the interest rates of Japan’s economy (with interest rates of 0%) and the economy of an emerging country like Brazil (with interest rates of 7%). The process would be roughly like described below:

-We borrowed 10,000,000 yen at an interest rate of 0%, which means that within a year we would have to pay back 10,000,000 yen.

-We sell the 10,000,000 yen and buy dollars at an exchange rate of 100 yen to the dollar and in this way we get 100,000 dollars.

-We sell the dollars obtained and buy Brazilian real at an exchange rate of R$ 3 per dollar, obtaining R$ 300,000.

-With the Brazilian real we buy bonds or bills of the Brazilian central bank with an annual maturity and an annual yield of 7%. Within a year we will receive 321,000 reais (capital plus interest).

-Now we must pay the initial credit by returning the 10,000,000 Japanese yen we borrowed. Assuming the exchange rates have not changed, we exchange real to dollars and get $107,000. Then we change the dollars into yen and get 10,700,000 yen.

-Finally, we return the 10,000,000 yen of the initial credit and we have 700,000 yen (equivalent to 7,000 dollars) of benefit.

In this way, we have obtained a profit-based exclusively on the deference of interest rates. In this example, we assume that exchange rates remain constant, but what would happen if, for example: does the Japanese yen revalue and after a year go from 100 yen to the dollar to 90 yen to the dollar?

In this case, by exchanging the $107,000 obtained to yen we will receive 9,630,000 yen. We must pay the initial loan of 10,000,000 yen, therefore, we would have a loss of 370,000 Japanese yen that would be equivalent to a loss of 3.7% in the carry trade operation.

Risks Associated with a Carry Trade

As we saw in the example above one of the most important risks for the foreign exchange trader or investor arises when exchange rates do not move in their favor, that is, the currency you borrowed is revalued or the currency is devalued in the money you borrowed was invested.

There is another risk, which is associated with the choice of the asset to invest in since we can invest in the bond market, equity market, or real estate market. In the case of shares or the real estate market, we do not have a guaranteed return and in the case of the fixed income market, there is always the risk of default by the issuer of the bonds.

How to Use Carry Trade in the Forex market to Maximize Profits

In the Forex market when we open a position, we’re basically borrowing one currency, trading it for another, and depositing it. All this happens on a daily basis, so if a trade remains open from 5 pm, New York time, the trader will be paying the overnight interest rate on the borrowed currency and at the same time earning the interest rate on the held currency.

Because each currency pair is made up of two currencies representing two economies with two different interest rates, most of the time there will be a spread in the interest rates of the pair. This difference will result in a net gain or interest payment. Interest is paid in the currency borrowed (sold) and paid in the currency purchased. In this way, each currency pair has an interest payment and an interest charge associated with maintaining the position.

This means that if we buy a currency with a higher interest rate than the borrowed currency (sale), and keep it open after 5 pm, New York time (23:00h Spain), the net interest rate differential will be positive and we will make money with this. Otherwise, if the currency we buy has a lower interest rate than the borrowed currency, the net spread will be negative and we will pay interest to keep that transaction open after 5 pm (New York time).

This interest rate differential that we earn or must pay, you can find it on your trading platform under the name of Swap or Rollover. In the specifications of each currency, we will have a long position swap (buy) and a short position swap (sell).

In order to use this strategy in practice we must take into account the following:

1. Find currency pairs with a positive swap

You can see this information on the website or on your broker’s platform. If you use Metatrader you have it easy, you can see it by right-clicking on the asset in question in “contract specification”.

2. Conducting a favourable swap transaction

Once we have located an opportunity (this is easy) you should not do an operation for no reason. The idea is to make a transaction through a profitable system and also that the swap is favorable to you. The swap will generate a daily plus and in the event that the transaction leaves by stop loss (loss) will be less. And if the operation is profitable it will be greater. It is a plus in our operation.

3. More medium-term long-term vision

Keep in mind that the time in this type of operation is in your favor so keep in mind that these operations are not short-term and are raised to get the juice from them during their duration.

4. Sound risk assessment and capital management

As with any other type of trading system and trades, before you open a trade make sure you know what percentage of the account you can lose. Do not be optimistic because the swap is favorable, the operation can go against you shortly after opening it, and if you have not measured the risk well you can have a bad time.


In conclusion, tell you that carry trade is a strategy based on fundamentals that try to profit from the difference between currency pairs and the interest rates. Therefore, you should be very clear that interest rates are and what fundamental factors affect them.

It is a long-term lake strategy so patience is key to getting the desired results. Despite being a long-term operation, this doesn’t mean you can open an operation and forget about it. It is necessary to monitor interest rates and possible changes in the rates and monetary policies of the central banks of the disputed currencies in such a pair.

Exchange rate risk is a critical factor in the carry trade, which is why this strategy works well in periods of low volatility. On the contrary, you should always bear in mind that carry trade is a high-risk trading strategy in periods of instability such as the current one. However, if the swap significantly affects your operation you can consider the operation to exploit only the positive swap part.

Forex Price-Action Strategies

Price Action Trading: Weekend and Partial Profit Taking

Partial profit taking is an option to be safe with our investment. It provides less reward to some extent. However, for the Forex traders, it is a great way to make sure that they cash in some profit or lose less money in a particular trade. In today’s lesson, we are going to demonstrate an example of a trade setup offering an entry four hours before the market closes. Traders have only one H4 candle to hit their target, or they would have to carry the trade during the weekend. Let us find out what we should do in such a situation

This is an H4 chart. The price heads towards the South at a moderate pace. The last candle comes out as a bullish engulfing candle. This may work as a bullish reversal for the minor charts’ traders. However, the H4 breakout sellers are to wait for the chart to produce a bearish engulfing candle closing below consolidation support to offer them a short entry.

The price makes a bearish breakout. However, the H4 breakout sellers do not wait for such a breakout. The last candle comes out as a bearish engulfing candle, but the consolidation is shallow. Thus, the sellers may skip taking this entry as well.

Again, the price consolidates and makes another bearish move. This time it does not make any bearish breakout. The chart may end up producing a double bottom here. It is a long way to go. Meanwhile, the sellers must wait.

The chart produces a bullish engulfing candle followed by a bearish inside bar. Now, it looks that the buyers may take control. Let us proceed to the next chart and find out what happens next.

What a Surprise for the H4 breakout sellers! The last candle comes out as a bearish engulfing candle closing well below consolidation support. The sellers may trigger a short entry right after the last candle closes with 1 R by setting stop-loss above consolidation resistance. Do not forget this is Friday. The market is closing within 4 hours.

This is how the last candle looks. It suggests that the price may keep heading towards the South. However, carry trade during the weekend on the H4 chart is risky a little. The market often starts Monday with big gaps that affect the H4 charts. Thus, the sellers may consider taking a partial profit just before the market closes on Friday. It would not get them to achieve 1R in the end, but it would make sure that they earn some profit out of it. Even if the rest of the trade hits the stop loss, he will not lose as much as he would with his whole trade.