What is a Carry Trade in Forex?

Understanding the Carry Trade Strategy

A carry trade is a strategy where you borrow money in a low-interest-rate currency and invest it in a high-interest-rate currency. The profit comes from the interest rate differential - you earn the difference between what you pay and what you receive.

How Carry Trades Work

The mechanics are straightforward:

1. Borrow (Sell) low-rate currency: Japanese Yen at 0.1% interest
2. Buy high-rate currency: Australian Dollar at 4.35% interest
3. Earn the difference: 4.25% annually on the position
4. Hold the position: Collect rollover/swap payments daily

The Rollover Mechanism

In forex, positions held overnight incur a rollover (swap) charge or credit:

• Positive carry: You earn daily interest (buying AUD/JPY)
• Negative carry: You pay daily interest (selling AUD/JPY)
• Daily accrual: The interest adds up over time

When Carry Trades Work Best

Ideal market conditions:

• Risk-on environment: Investors comfortable taking risks
• Low volatility: Stable exchange rates protect principal
• Widening rate differentials: High-rate currencies raising rates further
• Strong fundamentals: High-rate currency has economic strength

Advanced Guidance

Build a repeatable, rules‑based process so decisions are consistent across sessions and instruments. Start from context (higher‑timeframe structure, positioning, macro tone), then define precise triggers and invalidation on execution charts. Track spread and depth so your order type matches conditions. Pre‑compute scenarios (breakout, fakeout, mean‑revert) and map actions for each to reduce hesitation.

Execution Framework

• Plan entries at levels with confluence (structure, momentum, time‑of‑day).
• Place stops beyond the logical invalidation, not arbitrary distances.
• Target at least 2–3R; scale out methodically and trail remainder.
• Avoid thin liquidity windows unless the setup explicitly requires it.
• Record slippage and spreads; poor fills can erase edge.

Review Loop

• Journal setups by session and pair to learn where they excel.
• Tag trades by catalyst (news, trend continuation, range breakout).
• Recalculate expectancy monthly; prune underperforming variants.

Risk Controls

Keep daily loss limits, reduce size after consecutive losses, and pause during regime shifts. Survival enables compounding; treat discipline and execution quality as part of your edge.