When trading on the Forex market, you are sure to hear the phrase carry trade. By understanding what a carry trade is, you are better prepared to trade on the Forex market. Every currency in the world has an interest rate attached to it, and the rate is decided by the country's central bank. A carry trade consists of selling a certain currency that has a low interest rate, and using the proceeds to buy a currency that has a much higher interest rate. The result is a gain in the difference of the interest rates for the two currencies. The difference between these two rates is called an interest rate differential. A Forex trader receives interest on the currency that they are long in, and the trader must pay the interest on the currency that they are short in. The difference in the interest rates is the cost of a carry trade.
The rate of a return on the investment with a carry trade can be quite substantial, but this depends on the leverage the investor chooses to utilize. With leverage at ten times, a seven percent interest becomes seventy percent, which is quite a profit. In the Forex market currencies are traded in pairs. Carry trades on the Forex market pay the interest every day into your trading portfolio. Forex trading is margin based trading, which means that you only pony up a small amount of capital and your broker covers the rest. Finding a suitable pair to do a carry trade with is not a problem. Find a pair with a high interest differential, and make sure that the pair has been in an uptrend.
There are three possibilities with a carry trade. The currency position can lose value, the currency pair can stay the same, or the currency pair can gain value. The great thing about a carry trade is that you collect the interest on the currency, and can still turn around and sell the currency for the same value. A carry trade is when one currency, with a low interest rat,e is sold to purchase a currency that has a high interest rate. The difference in the interest rates between the currencies is called the interest rate differential. Many Forex traders use carry trades to maximize the profits and returns in their trading account. When it is done right, a carry trade can offer spectacular profits for the Forex trader.
