Costs, Spreads & FeesCarry Strategy
Carry Trade
A strategy of holding a higher-yielding currency against a lower-yielding one to earn the interest differential.
What Carry Trade means
A carry trade borrows in a currency with a low interest rate and holds one with a high rate, capturing the differential as a daily credit through the rollover mechanism. Because forex positions are leveraged, a modest annual differential applied to a large notional can produce a meaningful return on the margin posted. The strategy has historically been expressed through pairs combining a high-yielding commodity or emerging market currency against a funding currency such as the yen or the Swiss franc.
The return profile is the strategy's defining feature and its principal danger. Carry accrues in small, steady daily increments and is lost in sudden, violent unwinds: when risk appetite deteriorates, the same leveraged positions are liquidated together, and the exchange rate can move more in a session than the carry earns in a year. Interest rate parity says forward prices already embed the differential, so a carry trade is in effect a wager that the spot rate will not depreciate as much as the forward market implies.
Practical execution matters as much as the concept. Retail traders receive the differential net of the broker's markup, which can consume a large share of a modest spread, and swap-free accounts remove the credit entirely, making the strategy impossible there. Position sizing must assume that the leverage which magnifies the carry magnifies the drawdown identically, and correlated carry positions across several pairs are effectively one trade.
Worked example
If one currency in a pair yields 4.5 percent and the other 0.5 percent, a standard lot held long the higher yielder might earn roughly USD 11 per night before markup, around USD 4,000 a year, which a 400 pip adverse move would erase.
Related terms
- SwapThe interest credited or debited for holding a forex position overnight, based on the two currencies' rate differential.
- Interest RateThe price of borrowing money, expressed as a percentage per year, with the central bank's policy rate anchoring the whole structure.
- Interest Rate ParityThe no-arbitrage relationship linking spot and forward exchange rates to the interest rate differential between two currencies.
- Risk-On / Risk-OffA framework describing how markets rotate between appetite for higher-yielding assets and demand for defensive ones.
- LeverageThe ratio between the notional size of a position and the margin a trader must post to open and hold it.
Frequently asked questions
What does Carry Trade mean in forex trading?
A strategy of holding a higher-yielding currency against a lower-yielding one to earn the interest differential.
How does Carry Trade work in practice?
The return profile is the strategy's defining feature and its principal danger. Carry accrues in small, steady daily increments and is lost in sudden, violent unwinds: when risk appetite deteriorates, the same leveraged positions are liquidated together, and the exchange rate can move more in a session than the carry earns in a year. Interest rate parity says forward prices already embed the differential, so a carry trade is in effect a wager that the spot rate will not depreciate as much as the forward market implies.
What is an example of Carry Trade?
If one currency in a pair yields 4.5 percent and the other 0.5 percent, a standard lot held long the higher yielder might earn roughly USD 11 per night before markup, around USD 4,000 a year, which a 400 pip adverse move would erase.
Trade with a regulated broker
Understanding the terminology is the cheap part. The expensive part is choosing a counterparty whose execution, financing and withdrawal behaviour match what the marketing implies. Every broker below has been reviewed with a funded live account, and each review states which legal entity and which regulator applies to the account you would actually open.
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