When it comes to forex trading, the carry trade strategy is one of the most popular strategies. Besides retail traders, it is also used by hedge funds in particular. The system lies in buying a currency with a high interest rate and simultaneously selling a currency with a low interest rate. This allows traders to profit from the interest earned by holding overnight, in addition to the fluctuations in the exchange rate. Of course, this only works if the chosen broker also pays interest for holding a position. The carry trade strategy should only be used under normal conditions and not during a crisis or a longer-term correction.
Advantages of the carry trade strategy:

  •     Profits from price fluctuations and interest
  •     Long-term profit potential

Disadvantages of the carry trade strategy:

  •      Only promising in a growing economy

Application of the Carry Trade Strategy:

  •     First, a currency pair with a comparatively high interest rate is selected. Suitable for this are for example AUD/JPY, NZD/JPY and GBP/JPY.
  •     Then go long or short in the currency pair. The direction depends on whether a positive interest rate is granted for holding.
  •     To avoid a larger loss, at least on paper, a position size as moderate as possible should be chosen.
  •     The carry trade strategy is one of the few strategies where no stop loss should be set.
  •     Now you wait until the position makes a sufficient profit or a crisis or correction is expected.

An example: This is how the carry trade strategy can have an effect

Between the end of 2000 and mid-2006, the British pound had an interest rate of 5 percent. During the same period, the interest rate of the Chinese yen went towards 0. This caused, holding the positions overnight, an interest rate of almost 5 percent. With a leverage of 1:100, this results in an interest rate of about 2,500 percent for the entire period. Add to that an increase of 6500 pips for the GBP/JPY currency pair over the same period. From this point of view, the carry trade strategy would have enabled enormous profits over this period.
It should not be forgotten that the carry trade strategy involves a certain risk. In 2007, the uptrend ended abruptly, leaving little time to close the positions in question. Traders should always be aware of the risk and carefully consider whether to use the carry trade strategy.

To reduce the risk of the carry trade strategy, it makes sense to test it thoroughly in advance with Exness mt4. Most brokers offer a free demo account for this purpose. Use our broker comparison to find the best Forex broker in Thailand for a carry trade strategy.

Expert Tip:

The demo account is an important helper in terms of carry trade strategy and should be used excessively. Just because a first trade has worked, this does not necessarily mean that the entire strategy will be successful. Therefore, it is important to take your time here and test the strategy at your leisure before committing any capital.