The carry trade is a forex strategy that has been widely used by fund managers, and is often a form of ‘global macro’ strategy with both quantitative and economic/fundamental aspects involved in finding opportunities.
A carry trade involves the purchase of a currency that has a high interest rate using money borrowed in a currency with a lower interest rate, the aim being to benefit from increasing prices in the currency purchased along with the interest rate differential between the two. In order to understand and implement a successful carry trader, the forex trader needs to understand both the dynamics of the spread between the two currencies, as well as central bank policies. Ideally the interest rate of the currency you buy should expanding due to rising interest rates, and the currency that is sold short should have a contracting interest rate.
Carry trade positions often follow a long term trend in a forex pair, use relatively little leverage, and are held for a long period (typically months or years). If you are considering using this strategy you would be advised to divide your capital amongst multiple currency pairs to create a reduced risk portfolio. Your biggest risk will be central bank intervention in one of the currencies you are long.
In order to successfully use this trade you will need to find a forex broker who pays (and charges) interest in line with the standard rate for that currency. Not all brokers do this – if in doubt, ask your broker.
A carry trade involves the purchase of a currency that has a high interest rate using money borrowed in a currency with a lower interest rate, the aim being to benefit from increasing prices in the currency purchased along with the interest rate differential between the two. In order to understand and implement a successful carry trader, the forex trader needs to understand both the dynamics of the spread between the two currencies, as well as central bank policies. Ideally the interest rate of the currency you buy should expanding due to rising interest rates, and the currency that is sold short should have a contracting interest rate.
Carry trade positions often follow a long term trend in a forex pair, use relatively little leverage, and are held for a long period (typically months or years). If you are considering using this strategy you would be advised to divide your capital amongst multiple currency pairs to create a reduced risk portfolio. Your biggest risk will be central bank intervention in one of the currencies you are long.
In order to successfully use this trade you will need to find a forex broker who pays (and charges) interest in line with the standard rate for that currency. Not all brokers do this – if in doubt, ask your broker.