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Carry trade: meaning in forex and gold trading

A carry trade buys a higher yielding currency against a lower yielding one to earn the interest rate differential through swaps.

Last updated: · By Forexuro Desk · Editorial policy

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Definition

Carry trade: A carry trade buys a higher yielding currency against a lower yielding one to earn the interest rate differential through swaps.

How a carry trade works

If one central bank has much higher rates than another, holding the high yielder against the low yielder can earn a positive swap each night. The yen was the classic funding currency for many years because Japanese rates were very low. Carry is driven by the interest rate differential, so it changes as central banks move.

Risks

The swap income is small compared with price moves. When risk sentiment sours, carry trades can unwind fast and the funding currency can rally sharply. Broker markups also mean the swap you receive is less than the raw rate gap.

Worked example

With US rates well above Japanese rates, a long USD/JPY position may earn a positive swap. But if the pair falls 300 pips in a risk off move, that wipes out many months of swap income.

Common mistakes

  • Treating carry as risk free income.
  • Ignoring the broker's swap markup.

If you follow trade signals, for example the gold signals or EUR/USD signals, understanding this term helps you size and manage each trade yourself. The free Forexuro Telegram channel shares daily market updates where these ideas are used in practice.

Swap (rollover)

A swap is the overnight financing charge or credit applied to a position held past the broker's daily rollover...

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Interest rate differential

The interest rate differential is the gap between two countries' interest rates, a key driver of currency flow...

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Rollover

Rollover is the daily process of extending open positions to the next value date, when brokers apply swap char...

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Central bank

A central bank sets a country's monetary policy, including the main interest rate, and is one of the biggest d...

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Tools and guides

Frequently asked questions

Is the carry trade still used?

Yes, but its appeal depends on current rate gaps and volatility.

Can I lose money on a carry trade?

Yes. Price moves can easily outweigh swap income.

Education only, not financial advice. Trading forex, gold and CFDs carries a high risk of losing money, and leverage magnifies both gains and losses. Past performance is not a reliable guide to future results. Read our risk disclosure.