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The best time to get into a carry trade is when central banks are raising (or thinking about) interest rates. Many people are jumping onto the carry trade bandwagon and pushing up the value of the currency pair. Similarly, these trades work well during times of low volatility since traders are willing to take on more risk. As long as the currency's value doesn't fall — even if it doesn't move much, or at all — traders will still be able to get paid.

When one country tightens its monetary policy (i.e., raises interest rates and/or contracts its money supply) while another is easing (i.e., lowering interest rate and/or expands its money supply) or holding steady, this provides the opportunity not only for carry – assuming the country tightening its monetary policy has a higher-yielding currency to begin with – but for capital appreciation as well.

The idea of going long currencies before they tighten monetary policy and short those that are easing is, of course, a strategy that exists outside of the carry trade concept.

But a period of interest rate reduction won't offer big rewards in carry trades for traders. That shift in monetary policy also means a shift in currency values. When rates are dropping, demand for the currency also tends to dwindle, and selling off the currency becomes difficult. Basically, in order for the carry trade to result in a profit, there needs to be no movement or some degree of appreciation.

Low volatility, risk friendly