Carry Trade
Also known as: Carry Strategy, Interest Rate Differential Trade, Swap Trading, Positive Carry
What is it?
A carry trade holds a currency pair in the direction that pays interest, earning the difference between the two countries' policy rates for as long as the position stays open. The mechanics run through the overnight swap. If the Mexican peso pays around 11% and the Japanese yen around 0.5%, holding long MXN/JPY earns roughly a 10.5% annual differential - on a 100,000-unit position that is close to $29 a day credited by the broker, before the broker's own markup on the swap.
- 1Sell the low-yield currency You fund the position in a currency with a low policy rate - the Japanese yen at roughly 0.5%. This is the borrowing leg of the trade.
- 2Buy the high-yield currency The other leg buys a currency paying far more - the Mexican peso at roughly 11% - which leaves you long MXN/JPY.
- 3Collect the swap each night At rollover the broker credits the rate difference. On a 10.5% differential that is close to $29 a day per 100,000 units, before the broker's own markup.
- !Carry the exchange-rate risk The income only nets out if the pair holds. A 4% adverse move in MXN/JPY erases more than a year of accrued swap in a matter of days. Your capital is at risk.
Nothing has to happen to the exchange rate for that credit to arrive. The exchange rate is exactly where the risk sits. That same position accrues its swap slowly and can lose it quickly: a 4% adverse move in MXN/JPY erases more than a year of accumulated interest in a matter of days.
Carry trades also tend to unwind together, because the pairs paying the most interest are usually the ones investors sell first when risk appetite drops - so the losses arrive at the same time across every carry position you hold. Your capital is at risk.
Why it matters: A carry trade earns interest slowly and can give back a year of it in days, so the exchange-rate risk always dominates the yield.
Annual carry = rate of the bought currency - rate of the sold currency
The income accrues in small daily amounts while the currency risk arrives all at once, so position size has to be set against the move, never against the yield.
Real-world example
A long MXN/JPY position earning roughly a 10.5% differential accrues about $29 a day per 100,000 units - an amount a single 4% adverse move in the pair can wipe out several times over.
How SignalBots handles it
Swap costs and credits are part of the cost model behind SignalBots signals, so a strategy that holds positions overnight is judged on its net result rather than on gross pips. Your capital is at risk.
See /risk-warning.
Pro tip
Check the swap your own broker actually credits before sizing a carry position - the broker's markup can remove a large share of the published rate differential.
Common pitfalls
Sizing the position off the yield instead of the currency risk, then holding through an unwind that costs several years of accrued interest.
Frequently asked questions
Which pairs are used for carry trades?
Traditionally a high-rate currency against a low-rate one - historically AUD/JPY, NZD/JPY, MXN/JPY and TRY/JPY. The pairs change as central-bank policy changes, so the differential has to be checked, not assumed.
How is the carry actually paid?
Through the overnight swap your broker credits or debits at rollover, usually around 22:00 UTC. Wednesday is normally charged at triple rate to account for the weekend settlement.
Can a carry trade lose money when the differential is positive?
Easily. The swap credit is small and steady while the exchange rate can move several percent in days, so an adverse move can exceed a year of accrued interest. Your capital is at risk.
Does leverage make a carry trade better?
It scales the interest and the currency risk by the same factor, and the currency risk is the larger of the two. Leveraged carry positions are the ones that get closed out first during an unwind.
Can a bot run a carry strategy?
Yes, and automation helps most with the risk side - monitoring the differential, sizing against volatility and exiting when the pair breaks a level, rather than with the entry itself.
Trading involves substantial risk of loss. Historical and backtested results do not guarantee future performance. Read the full risk warning.
