Carry trade strategy

Many of you, when familiarizing yourself with currency pairs and trading tactics, have repeatedly heard such an expression as Carry trade, but there is very little sensible information about this trading tactic on the Internet.

The fact is that Carry means a fee for providing a certain service. So, for example, if you were trading in the commodity market, you would pay Carry for holding your goods in a warehouse, and in the case of shares, you pay the holder of your shares.

In the foreign exchange market, Carry is charged by the broker for holding a position for the next day, so sometimes when you look at data on open transactions in your trading terminal, you may see a negative or positive value in the Swap column.

Carry trade strategy practical application on Forex.

In the Forex market, the counted Swap is our Carry, it’s just that in world practice it has been customary to use the term Swap. Actually, where does the swap itself come from and from what is it calculated?

Swap is the difference in interest rates of the central banks of the currencies we trade. The fact is that when trading Forex we do not buy currency with money, but during speculative operations we seem to borrow one currency and buy another for it.

As you know, each country has its own interest rate at which we borrow money, so when we roll over a position to the next day, we pay a kind of debt for using credit funds. Because of the difference in interest rates, our Carry actually arises, which can be either positive or negative. Before we begin analyzing the strategy, let's find out what an interest rate is.

The interest rate is the payment for money lent to the bank. As you understand, different countries have different interest rates, for example, the Japanese yen can be obtained at 0.1 percent, and in Europe the central bank issues euros to its banks at 0.05 percent.

The decrease in market liquidity and volatility has led to the fact that traders simply cannot earn enough from differences in exchange rates, so a new approach to trading in the foreign exchange market called Carry trade has emerged.

Its essence is that the trader, for holding his position, receives a daily positive swap into his account, and under good circumstances, he also receives a profit from the exchange rate difference. To understand what the point is, imagine that you took Japanese yen at 0.1 percent to buy an Australian dollar with an interest rate of 2 percent.

Next, you keep the Australian dollar in a safe deposit box and you receive our positive Swap in the amount of 2 percent, while the difference between the debt rate and the one we received is 1.9 percent, which is actually our profit. The same principle applies to a swap, so when you buy a currency with a high interest rate for a low one, you get a positive Swap and the entire Carry trade is built on this.

To start trading using the Carry trade strategy, you need to select currency pairs with high and low interest rates, and the difference should be striking. To do this, open data on the latest interest rates. Your task is to buy a currency with a high interest rate and sell a currency with a low interest rate.

The profit for holding a position is calculated after the clock hand passes the 24:00 mark, and on the night from Wednesday to Thursday the swap is tripled. Classic currencies with low interest rates are the Japanese yen, euro, Swiss franc, British pound, as well as the currencies of Sweden and Denmark.

Some traders also include the American dollar among those listed above, but it is not suitable for Carry trades, because this currency is highly speculative and the difference in the exchange rate movement can simply kill all the profit from the positive Carry received. Currencies with a high interest rate are primarily considered to be the Australian dollar , New Zealand dollar, Brazilian real, and South African rand.

It is quite simple to calculate the possible profit; subtract the smaller one from the larger interest rate, then multiply by the position volume, divide by 100 and divide by the number of days in the year. This way you can find out the amount of money you will receive per day using the Carry trade strategy.

Unfortunately, trading using this strategy is not as simple as it seems at first glance. The fact is that in order to use this strategy, there must be some kind of calm in the market without any global crises.

It is also worth choosing an instrument whose trend clearly coincides with the accrual of a positive swap, otherwise if you enter against the trend and it really moves strongly against you, then no profit from the Carry trade strategy will save you from the exchange rate difference. Therefore, it is worth finding currency pairs that are either marking time in a narrow price range or, by buying a currency pair with a high interest rate, its trend should also move upward.

When selling an asset with a low interest rate, the conditions are the same, but in reverse. Also, do not forget that you need to choose currency pairs that maintain a stable interest rate, since if it changes frequently, you simply will not be able to earn money due to the high exchange rate difference it leads to.  

In conclusion, I will say that for successful trading using the Carry trade strategy, it is necessary to form a basket of different currency pairs, since unexpected changes in interest rates on one currency pair can be compensated by stability on another trading instrument.

Try to choose instruments with very different interest rates, for example the zar/jpy currency pair has radically different interest rates , namely the South African rand 6 percent, and the Japanese yen only 0.1 percent. Approach the selection of currency pairs carefully, since this will determine your future profit.