There are many different ways to look at trading the Forex, and while each trader will have his or her own strategies for getting ahead in the market, carry trades are one type of currency trading that have a large following and it really isn’t hard to see why. Because different currencies are being traded and being leveraged at a large level, differing interest rates can actually have a major effect on whether a trade is profitable or not. This is a type of currency trade that should interest many traders.
Just What Is a Carry Trade?
A carry trade takes one currency that has a very small or virtually no interest rate and trades that major currency against another one that has as high an interest rate. The difference in interest rates allows for the trader to collect the interest on the leveraged money. This interest is added into the profits or added to off-set the loss in any carry trade on the Forex market.
So if there’s a 2% difference in interest rates between the currencies being traded and a trader is using $10,000 to leverage $1 million, if their trade is open at the end of a day, they can collect the interest that would be earned from that $1 million. This can help recover pips on a bad trade, turn a break even trade into a good one, and turn a good one into a great one. That is the potential beauty of a carry trade giving something of a safety net while also providing additional profits to add onto any good trade that gives you a net gain.