Carry trade

The purpose of a carry trade is to profit from the difference in interest rates or the “interest rate differential” between two separate foreign currencies in a pair. A carry trade strategy can be either negative or positive, depending on the currency pair​​ that you are trading. A carry trade in forex follows the above strategy to allow a trader to profit from the difference in interest rates between the base and secondary currencies in a forex pair.

As the purpose of a carry trade is to pay a lower interest rate on the asset that you are borrowing, this means that you should profit from a higher interest on the asset that you have bought. Most traders will enter a positive position with the hope that the higher yielding currency will appreciate in value.

When trading the forex market, our traders are required to trade on margin​, or in other words, using leverage​. This means that you only need to place a fraction of the full trade value in order to gain exposure to the currency market, which acts as a deposit. Leverage can work in your favour if the trade is successful, but it can also magnify your losses if the trade is unsuccessful. Traders should be cautious when trading on margin and always have a risk management plan to offset as much capital loss as possible. We will consider the use of leverage in a carry trade in the example below.

For example, let’s say that an investor decides to deposit £1000 into a forex trading account. He chooses to trade AUD/JPY for a positive carry trade, which has an interest rate differential of 5%. Using a leverage ratio of 20:1 (based on our margin rate for this instrument), he can open a position for £20,000 of the currency pair, meaning that the deposit is only 5% of the full value.

Depending on which way the market moves, this carry trade strategy can result in various outcomes:

We offer the option to trade on over 330 currency pairs on our award-winning forex trading platform*, which is the highest in the industry. With tight spreads that start from just 0.7 points, low margin rates of 3.3% and lightning-fast execution, our platform is fully adaptable to a large number of forex trading strategies.

Before opening a carry trade position, it is important to build a trading strategy and explore our range of risk management tools. Forex trading can be volatile and this often results in loss of capital due to unforeseen price movements and events within the market. Placing a stop-loss order on your trade can help to manage risk by specifying the maximum amount that you are willing to risk on a trade before closing you out of the position. For extra safety, a guaranteed stop-loss takes into account gapping and slippage on price charts as well, minimising your risk further. Read more about our range of execution and order types.

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The stability (or instability) of an economy can have a significant impact on carry trade rates, especially within the forex market. This is because interest rates are subject to inflation and other external events, which can cause the value of currencies to fluctuate often. To keep up to date with the latest trading news and economic announcements, our news and analysis​​ section of the platform is updated daily by our dedicated market analysts.