Best Carry Trade Strategy: How To Profit From Forex Interest (2024)

The number one trade in the Forex market is a $14 trillion dollar trade. This trade is captured with the best carry trade strategy. In most cases, it’s going to take a lot of time to become a profitable trader. However, if you choose the right currencies, the Forex Carry Trade strategy is the only strategy that will make you some profits on the first day.

Our team at TSG has put a lot of effort into providing traders with more information about the Forex currency market. If you don’t know how to protect earned profits in the currency market, it doesn’t matter how much money you make in the stock market or options market.

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Moving on, let’s dive into the Best Carry Trade Strategy!

Intro — Best Carry Trade Strategy

With carry trading, In the long term, you may not have any profits on your position, or you may have a great deal of profits. Currencies are always being evaluated and fluctuate constantly. That’s why we’re trying to give traders an opportunity to learn more about the carry trading.

When trading the Forex Market, every time you enter a trade with your Forex broker, you’ll actually earn some interest. Or you’ll have to pay some interest at the end of the day. When you use leverage, you’re actually borrowing money. When you open 1 standard lot, you’re not using $100,000 of your money. You’re only using $1,000 if your FX broker offers you a 1:100 leverage.

In the first part of the carry trade strategy PDF, we’re going to explain what the carry trade is and how it works. In the second part of the Forex carry trade guide, we’re going to outline the rules for the best carry trade strategy.

What is the Carry Trade?

Let’s talk about what the carry trade is, and how we can take advantage of the difference in interest rates between currencies. Carry trades involve going long on a currency with a higher interest rate. At the same time, you’re going short a currency with a lower interest rate.

The higher interest rate currency is the invested currency. The lower interest rate currency is the funding currency.

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When you trade currencies, you simultaneously buy one currency and sell another currency from a different country. Since these currencies have an interest rate attached to them, depending on how you positioned yourself in the market, you’ll either have to pay an interest rate or earn an interest rate.

The interest payment occurs at the end of every business day at 5:00 PM EST, which is when funds rollover.

Basically, the carry trade is a long-term trade that is looking to capture the interest rate. What you need to do is to look at pair selection driven by the interest rate differential. You want to borrow cheap money and put it somewhere where they’re going to pay you a high return on investment for that money.

When a trader is long a currency with a higher interest rate, and short a currency with a lower interest rate, the trader will earn a positive carry. On the other hand, if you hold a currency with a lower interest rate, and you’re short a currency with a higher interest rate, you’ll have a negative carry. In this case, you have to pay the interest rate differential.

The second part of the carry trade strategy PDF will show you how to trade the Best Carry Trade Strategy works in real life.

Let’s take a look at a real case scenario. At the moment of writing this article, the US interest rate is 5%, while the interest rate in the UK is 4.25%.

The bottom line is that if you would have sold GBP/USD you would earn $4.37 per day. Not quite huge money, right?

Let’s change the way you think about it, let’s think long-term. No one really cares about earning $4 per day.

However, if you held that trade for a year, then those $4 would turn into $1,593. Even if after one year the GBP/USD exchange rate would be at your break-even point you would still make money because of the interest earned.

However, at the end of the day, high yielding currencies also tend to appreciate because of higher demand. You will also be making money from the currency appreciation in which case the interest earned will pale in comparison to the profits made through the positive exchange rate fluctuation.

To better understand how Forex Carry Trade strategy works, let’s look at what carry trade strategy is not. The best carry trade strategy is not the type of strategy where the next morning you make massive profits overnight. Carry trading uses a ‘buy-and-hold’ strategy, so it requires a lot of patience and even it requires discipline. Read more about “buy and hold” positional trading strategies here.

You need to find the right market conditions, which is the whole essence of carry trading.

Now, before we go any further, we always recommend taking a piece of paper and a pen and take note of the rules of this scalping strategy.

Step #1: Pick one high-interest-rate currency and one low-interest-rate currency.

If you’re a beginner, we encourage you to stick to the G7 currencies. Avoid the emerging market currencies, which often offer a high yield. A currency like South African Rand, Turkish Lira or the Russian Ruble is more sensitive to any headwinds in the financial system.

When there is risk aversion in the market, investors will usually first sell these risky currencies.

The higher the interest rate differential between the two currencies, the greater the opportunity you have to earn interest.

Additionally, you have to keep in mind that since currencies are leveraged instruments. Every time you open one standard lot you’re basically borrowing money from your broker. Your interest rate will depend on the interest rate differential between the two currencies, how large your position is, the rollover cost and the final swap rate debited or credited to your account. This means your interest rate will be different than the real interest rate differential.

If you want to optimize the best carry trade strategy, then you have to also pick the Forex broker that offers you the most attractive swap rates.

From the above table, we can recognize that the highest net return is offered by going long NZD/CHF. The official benchmark interest rate in New Zeland is 1.75%, while the official benchmark interest rate in Switzerland is -0.75%. This makes NZD/CHF one of the best carry trade pairs 2018.

The currency you’re trading needs to be correlated opposite one another. This way you have a positive carry trade if you go long the high-yielding currency and go short the low-yielding currency.

We also take into consideration other factors when deciding to place a trade based on the carry trade.

See below:

Step# 2: The technical trend needs to confirm the positive carry trade direction.

Another factor that makes the carry trade very attractive is the fact that you can also earn money from currency appreciation. So, in addition to the possibility of earning interest, we also look to gain from the currency exchange fluctuations.

If we want to capture the positive carry trade we need to belong to NZD/CHF. But if we want to also benefit from the currency exchange rate appreciation we need to wait to have favorable bullish conditions.

The most favorable bullish conditions are when NZD/CHF trades above the 200-day EMA.

This is also the most common way hedge funds read the trend direction is to use the 200-day moving average.

Next, we’re going to highlight how professional traders manage the carry trade.

See below:

Step# 3: When to take profits on the carry trade and how to manage risk.

First of all, the carry trade works best in a risky type of environment. In other words, you need to look for a sentiment or a mood in the market where investors are in the mode of wanting to take on risk.

When you use this as your barometer, you can buy more exotic currencies that have even double-digit interest rates.

The way smart money thinks is if the stock market is in an uptrend or moving up, then they assume investors are in a risk-taking type of environment. Conversely, when the stock markets turn down, we’re in a risk aversion type of environment and investors will sell risky assets in which case the carry trade will not work.

You need to optimize your carry trade by learning how to read when it unwinds. The carry trade is a buy-and-hold mentality. But be careful, at some point, the trend will eventually reverse. We can use the 200-day EMA to read when the trend is about to change and close the trade once NZD/CHF breaks below the 200-day EMA.

The NZD/CHF exchange rate traded above the 200-day EMA for 328 consecutive days in which case you would have captured $2,764.35 just from the interest rate.

Depending on your entry point, the maximum profits earned from the currency exchange appreciation is approximately $5,500, earning you a potential profit of $8,264.35

Conclusion – Carry Trade Strategy PDF

The Forex Carry Trade strategy is a common strategy used by many hedge fund managers and institutional traders that are risk seekers. The high yield nature of these currencies is what attracts investors to buy them. Hedge funds need to generate a return on behalf of their investors and the most common practice is to chase higher yields.

This carry trade strategy PDF is like a net cash-grabbing machine because you’ll not just earn money from the carried interest, but you’ll also grab cash from the actual trade. You can build your account much more rapidly with the forex carry trade strategy.

The only downside risk of the carry trade is being caught in a drawdown that winds up in a margin call. This can happen if you put at risk too much percentage of your balance so you need to learn to use proper risk management strategy.

Thank you for reading!

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