HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
MultiBank Group information and reviews
MultiBank Group
84%

Forex Carry Trading: A Comprehensive Guide for 2023


Written by Feng Zhou  Senior Market Analyst Feng Zhou

As the echoes of the 2008 financial crisis still resonate, the world is now grappling with a new economic challenge: swift inflation. This inflation surge has brought the carry trade back into the limelight, a strategy that had faded away post the 2008 debacle. Carry trading has re-emerged as a potential avenue for forex enthusiasts. Let's delve into this technique, exploring its mechanisms, benefits, risks, and its place in the historical context.

Understanding Carry Trading

Carry trading, at its core, is a strategy where investors seek to profit from the difference in interest rates between two currencies. Instead of capitalizing on fluctuations in currency values, traders earn based on interest rate spreads. Imagine a Swede with a savings of 200,000 SEK (around US$19,200). With the interest rates offered by Sveriges Riksbank at 2.5% in November 2022, and retail banks giving even lesser, there’s not much to earn. Enter Hungarian banks with their alluring 13% interest rates. However, converting SEK to Hungarian forint poses currency exchange risks.

Modern traders can bypass this hurdle by utilizing derivatives, specifically contracts-for-difference (CFDs), to tap into lucrative interest rates in different countries.

Harnessing Derivatives for Carry Trading

CFDs stand out in the derivatives market for their non-expiry feature. This means traders can hold onto them for as long as they deem fit. But there's a catch: holding CFDs overnight means undergoing a tom-next trade, which involves adjusting positions through swaps. These swap rates are directly linked to the interest rate differences between currencies. Until recently, positive carry, where the interest earned exceeds interest paid, was a rare gem in the forex world.

Positive Carry Explained

A rollover at 17:00 New York time daily sees brokers either pay or collect swaps. When the swap is positive, traders stand to gain, and this opportunity is termed as a positive carry. Successful trades should ensure the positive swap outweighs any potential exchange rate losses.

Leverage: Amplifying Carry Trading

By leveraging, traders can enhance their potential profits from positive swaps. For instance, with a 1:20 leverage on a currency pair, a sizable position can be attained with a comparatively smaller capital. It simplifies currency management, allowing a trader to transact in different pairs without needing to hold all the involved currencies.

Walking Through a Carry Trade

Assume a short swap rate of 15 pips for CHF/HUF. With each pip valued at 1,000 HUF for a 100,000 CHF/HUF position, that’s a nightly gain of 15,000 HUF (about US$40). Hold this from the 1st to the 30th of December 2022, and you could earn a whopping 450,000 HUF in swaps (nearly US$1,230). However, always consider the possible exchange rate variations which could affect profits.

Navigating the Risks of Carry Trading

All investments have risks, and the primary challenge in carry trading is the exchange rate fluctuations. To maximize success, the positive swaps should consistently surpass any exchange rate losses. Also, keep an eye on interest rates as they could flip a positive swap into a negative one. Using tools like stop losses can mitigate some of these risks, but vigilance is key, especially during central bank rate announcements.

Carry Trading: A Glimpse into its Past

While carry trading might seem like an arcane strategy, it was the talk of the town in the '80s and '90s. The Japanese yen, with its long history of near-zero interest rates, was often the currency of choice for such trades. However, the 2008 financial crisis and the subsequent slashing of interest rates across the globe took the wind out of its sails. Now, with the renewed interest in this strategy, the horizons seem promising again.

Identifying Ideal Currency Pairs

The wider the interest rate differential between two currencies, the better they are suited for carry trading. Platforms like cTrader and MetaTrader 4 are great resources to check current swap rates and to analyze the potential of various currency pairs.

Currency Interest rate Currency Interest rate
Hungarian forint (HUF) 13% Japanese yen (JPY) -0.1%
Mexican peso (MXN) 10.5% Swiss franc (CHF) 1%
Turkish lira (TRY) 9% Danish krone (DKK) 1.75%
Czech koruna (CZK) 7% Euro (EUR) 2.5%
South African rand (SAR) 7.25% Swedish krona (SEK) 2.5%
Polish zloty (PLN) 6.75% Norwegian krona (NOK) 2.75%
United States dollar 4.5%  

To successfully harness the benefits of carry trading, it's imperative to pinpoint those currency pairs that present a favorable swap rate. Furthermore, seeking out pairs characterized by minimal volatility can significantly mitigate potential exchange rate uncertainties. Alternatively, if delving into more volatile pairs, ensure the positive swap is substantial enough to counterbalance the inherent risks. This dual approach ensures that while you're capitalizing on interest rate differentials, you're also safeguarding your investments against unpredictable market fluctuations.

Currency pair 4-week volatility Pip value/lot Long swap Short swap
CHF/HUF 13.6 1,000 HUF -22.829 13.976
EUR/HUF 11.3 1,000 HUF -21.181 12.998
USD/HUF 15.3 1,000 HUF -16.607 10.078
EUR/CZK 3.9 100 CZK -5.058 1.996
USD/CZK 10.7 100 CZK -26.059 5.488
CHF/PLN 10.3 100 PLN -1.064 0.553
EUR/PLN 3.5 10 PLN -8.592 4.279
EUR/MXN 13.1 10 MXN -68.323 28.048
USD/MXN 8.7 10 MXN -47.4 16.156
EUR/TRY 10 10 TRY -117.425 50.645
USD/TRY 3.3 10 TRY -92.363 52.057
USD/JPY 15 1,000 JPY 1.119 -2.549

Embarking on Your Carry Trading Journey

While most forex brokers have their own dealing desks, they often can't match the swap rates offered by STP brokers. To truly maximize your carry trading potential, consider partnering with an STP broker. In conclusion, carry trading offers a unique avenue for traders, especially in an age of fluctuating interest rates. However, as with all investments, a keen understanding and careful monitoring are key to success.


RELATED

5 ways to get your strategy copied

Copy trading is one of the popular ways that allow professional traders to earn additional income on their trading by offering investors to...

Five Bitcoin Day Trading Setups to Help You Make Money

Day Trading is trading that moves fast. It involves making multiple trades in a market on a single day, quickly reacting to price fluctuations to make lots of small margins...

How Options Expiration Can Change How You Trade

Forex trading can be a very profitable venture, but it can also be quite dangerous. One of the risks you take when trading forex is the risk of options expirations...

Small-caps and large-caps. What’s the difference for those who buy them?

Shorthand for "market capitalization", the term market cap refers to the total value of all a company’s shares of stock. One can calculate it by multiplying...

Fundamental Analysis: A Complete Guide

Each trader wants to know which way the price will go. However, to get the closest to an answer to this question, it is necessary not only to watch the chart on the trading platform...

Understanding Buy and Sell Walls in Crypto Trading

The world of cryptocurrency trading is a dynamic and ever-evolving landscape. As investors and traders navigate this digital frontier, they encounter both promising opportunities and formidable obstacles...

Demystifying ECN and STP Trading: A Comprehensive Overview

When setting foot in the trading realm, the first, and perhaps most significant, decision lies in selecting the right broker. The trading platform you choose will serve as your constant ally...

Understanding ECN and STP Trading

Selecting a trustworthy and reliable broker is a fundamental step in your trading journey. Your trading platform should be your long-term partner, offering essential features and support...

Is MetaTrader 4 good for Crypto?

MetaTrader 4 is used to trade a variety of financial instruments including some of the world’s most popular cryptocurrencies. In this blog, we’ll look at the benefits of using MT4 for crypto trading...

Online Cryptocurrency Trading: Features and Advantages

The year 2008 marked the birth of the crypto market. It was in August when the domain bitcoin.org was registered and the description (White Paper) of the cryptocurrency was published...

US Stock Indices: The Past and the Present

There is a saying in the world of finance: "America will sneeze, but the whole world will catch a cold." But what is the way to determine how serious...

Steps on how to trade Cryptocurrency in 2020

Every country has its own paper or fiat currency which is usually printed and controlled by the national or central bank. This is why forex transactions are important...

The Dynamics of Commodity Trading: An In-depth Look

From the very clothes on your back to the coffee you sipped this morning, commodities influence our daily lives. This vast market encompasses a wide variety of goods...

Mastering the Art of Forex Profit Calculation

Forex trading, a venture both intricate and potentially rewarding, hinges on the precise understanding of profits and losses (P&L). As each trade unfolds, the fluctuating forex market presents a myriad of risks...

How to Create and Sell an NFT

In 2021, NFT triggered an immense interest across the internet. No wonder: people are ready to pay vast sums of money for NFTs, the cost of which can go up to millions of dollars...

What is spot trading in crypto and how does it work?

In a spot market, traders can immediately exchange their cryptocurrency for fiat currency or another cryptocurrency by placing a buy or sell order...

Options vs Stocks: Differences, Similarities, and Which to Choose

Stocks and options both involve dealing with company shares and equities, but are two different ways of investing. Between the two, stocks are more straightforward and easier to understand...

HF Markets Enhances Its HFcopy Trading Platform for Enhanced Trading Synergy

HF Markets has announced significant upgrades to its HFcopy program, catering to both Strategy Providers (SPs) and Followers, thereby solidifying its position as a premier copy trading platform...

Margin Call: What It Is & How to Avoid It

You have probably heard about an unpleasant surprise to traders: a margin call. And we hope you do not know how bad it might be for your money. A margin call is a broker’s demand...

When is the best time to buy Bitcoin?

Should you buy Bitcoin at $20k or wait for an even bigger drop? There are many arguments in favor of not postponing the purchase of the flagship crypto...

XM information and reviews
XM
82%
FP Markets information and reviews
FP Markets
81%
FXTM information and reviews
FXTM
80%
AMarkets information and reviews
AMarkets
79%
Octa information and reviews
Octa
79%
BlackBull information and reviews
BlackBull
78%

© 2006-2024 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.