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July 3, 2021

How to Carry Trade

Theo Ashley-Hacker

A Carry Trade involves selling a currency at a low interest rate and purchasing a currency that has a a high interest rate with the intention of gradually yielding a profit over time. You can think about it like buying a stock for dividends.

At the moment interest rates are near all time lows as Banks around the world tried to spur spending. This means that carry trading holds a low incentive as the biggest range in interest rates you can currently trade is 1%. This is historically very low and means carry trading is not very lucrative.

However as economic growth picks up and inflation rises, Central Banks around the world are looking at the possibility of re-raising interest rates. This opens the opportunity to carry trade.

How do you Carry Trade?

The incentive behind carry trading is that the odds are always in your favour. We know that interest rates are the biggest influencer of currency markets, so by trading in the direction of the currency with higher interest rates, we not only stand to profit from interest, but also stand a high chance of profiting by the currency we've bought appreciating while we hold it.

To enter a carry trade you can either find a currency pair with a large difference in rates or try to predict future rate changes, this is more risky but carries more potential for profit as shown by the incredible dollar bull run after the Fed announce they intend to hike interest rates.

Your broker will give you a quote for overnight swap, if your buying a currency with a higher rate than the one your selling this will be likely be positive meaning you will be paid and vice versa.

You should also check for economic news related to the currency your selling, high CPI and retail sales figures may be signs you should look for a different pair.

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DISCLAIMER: All comments made by TraderNick’s Forex Group, LLC are for educational and informational purposes only. All comments should not be construed as investment advice regarding the purchase or sale of any securities or financial instrument of any kind. Please consult with your financial adviser before making an investment decision regarding any securities or financial instruments mentioned by TraderNick’s Forex Group, LLC. TraderNick’s Forex Group, LLC assumes no responsibility for your trading and investment results. All information on any of the platforms utilized by TraderNick’s Forex Group, LLC was obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. TraderNick’s Forex Group, LLC, its employees, representatives, and affiliated individuals may have a position or effect transactions in the securities and financial instruments herein and or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading of any type involves very high risk and may not be suitable for all investors. TraderNick’s Forex Group, LLC, its subsidiaries and all affiliated individuals assume no responsibility for your trading and investment result. Read our full disclaimer here
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