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Carry trading is one of the most simple strategies for currency trading that exists. A carry trade is when you buy a high-interest currency against a low-interest currency. For each day that you hold that trade, your broker will pay you the interest difference between the two currencies, as long as you are trading in the interest-positive direction.

For example, if the Pound(GBP) has a 5 percent interest rate and the US Dollar(USD) has a 2 percent interest rate, and you buy or go long on the GBP/USD, you are making a carry trade. For every day that you have that trade on the market, the broker is going to pay you the interest rate spreads, which would be 3 percent. Such an interest rate difference can add up over time.

The lower yielding currency is referred to as the “funding currency” while the currency with the higher yield is referred to as the “target currency”.

The best way to first implement a carry trade is to determine which currency offers a high yield and which offers a lower one. The most popular carry trades involve buying currency pairs like the AUD/JPY and the NZD/JPY, since these have high interest rate spreads.  

Carry trading advantage

Carry trading is an advantage because, in addition to your trading gains, there are also interest earnings. Carry trading also allows you to use leverage to your advantage. When the broker pays you the daily interest on your carry trade, the interest paid is on the leveraged amount.