Learning Forex Carry Trade Strategy

The carry trade is a popular trading strategy used in the Forex market. It guarantees traders at least some return on their medium and longer term positions. Carry trade strategy is based on buying a high interest yielding currency and selling a low yielding currency. This allows the trader to earn the difference in the interest rates between the two currencies, referred to as the interest rate differential. The differences between interest rates of countries is what creates this opportunity.

Some speculators hedge the exchange rate exposure - aiming only to capture the interest rate differential. This return can be increased through leverage.
Some currency pairs that are usually selected to apply the carry trade strategy are: GBP/JPY, GBP/CHF, AUD/JPY, EUR/JPY, CAD/JPY, and USD/JPY

The carry trade works best under certain market conditions, and the selection of the currency pair can make the difference between a losing and a profitable trade. When selecting the currency pair, traders want to observe two things:
1 Trader wants to make sure he is buying the currency that has the higher interest rate and is selling the currency that has a lower interest rate in comparison.
2 Trader wants to view the currency will move to his favor.

Take example : buy EUR/USD, we will get 1.77$ per 24 hour on $20000 contract size. you are effectively earning 1.77$ USD on $20000 contract size for one day on a buy order, if we assume that you are trading at a leverage of 100:1 you will get 1,77$ on your 200$ money. On a month you will get about 54$, not to bad :).
See table below, showing interest rate(Dec 2009) from any different pair.

Summary :
- The carry trade strategy best work on medium and longer term positions.
- Where the pair move on the right direction you will get double profit : first Along with a profit on the actual trade itself, second is the carry trade.
- Where the pair move at opposite direction, you are just earning form money on the carry trade.
- Trader in long the carry, meaning that they are getting paid every day they hold their position, regardless of what happens to the exchange rate.
- Conversely Trader in short the carry, meaning that they are paying money every day, regardless of what happens with the exchange rate.

Current Forex Pair Interest Rates Table:

Note : Contract size = $20000,
On leverage 1:100 will work on $200 Money

Table is provide by mataf.net
Take On : Dec 2009