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The Carry Trade

The Carry Trade

Richard Krivo, Trading Instructor

Student’s Question:

Is there any advantage to earning interest on an overnite trade? Could this be used as a strategy when trading?

Instructor’s Response:

The advantage would be earning interest on the position provided that you are long the currency with the higher interest rate in the pair. It is called a carry trade and it can add pips to the trade even if price action does not move in the direction of your trade. The flip side of that is that if a trader is short the currency in the pair with the higher interest rate the trader will pay interest and it will subtract pips from the account should the trade move in your intended direction or not.A carry trade is one that is made based on the difference in interest rates between the two currencies in the pair. By buying the currency in the pair with the higher interest rate, pips will be gained each day at 5 PM Eastern. By selling the currency in the pair with the higher interest rate, pips will be subtracted from the account each day at 5 PM Eastern time.The link below will provide additional information on the strategy...http://www.fxcm.com/carry-trade.jsp

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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