Carry Trade
Borrowing in a low-interest currency to hold a higher-interest one, collecting the difference.
Also called: carry · positive carry
In plain language
A carry trade earns the interest rate differential daily. It is a strategy about yield rather than direction.
It works quietly for long stretches and then unwinds violently. The accumulated carry can be erased in days when the exchange rate moves against the position.
Carry trades are typically leveraged, since the daily differential is small relative to capital, which amplifies the unwind.
Why it matters
The carry trade is the classic example of a strategy with a high win rate and a devastating tail — profitable most days, occasionally catastrophic.
Common mistakes
- Sizing a carry trade for the yield while ignoring the exchange-rate risk.
- Assuming a long run of quiet accumulation means low risk.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The interest charged or earned for holding a forex position overnight.
Using borrowed capital to control a position larger than your account balance.
The probability that a series of losses reduces an account below the point of recovery.
How much and how quickly an asset’s price moves over a given period.
Two currencies quoted against each other, showing how much of one buys the other.