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Currency carry trades present traders with two avenues to profit (exchange rate and interest rate differential) but it is essential to manage risk as losses can arise when the pair moves against traders or the interest rate differential narrows.

Carry trading uses a ‘buy-and-hold’ strategy, so it requires a lot of patience and even it requires discipline.

Step 1: Pick one high-interest-rate currency and one low-interest-rate currency.

The higher the interest rate differential between the two currencies, the greater the opportunity you have to earn interest.

Additionally, you have to keep in mind that since currencies are leveraged instruments. Every time you open one standard lot you’re basically borrowing money from your broker. If you want to optimize the best carry trade strategy, then you have to also pick the forex broker that offers you the most attractive swap rates.

Step 2: The technical trend needs to confirm the positive carry trade direction.

Successful forex carry trades rely on upward trending currency pairs (target currency/funding currency). 

For higher probability trades, traders should look for entry points in the direction of an uptrend and should protect downside risk by utilizing prudent risk management techniques.

Step 3: When to take profits on the carry trade and how to manage risk.

First of all, the carry trade works best in a risky type of environment. In other words, you need to look for a sentiment or a mood in the market where investors are in the mode of wanting to take on risk.

The way the smart money thinks is if the market is in an uptrend or moving up, then they assume investors are in a risk-taking type of environment. Conversely, when the markets turn down, we’re in a risk aversion type of environment and investors will sell risky assets in which case the carry trade will not work.

Carry trade strategies

● Buy and hold – one or more positions are