Carry Trade on Forex stands for simultaneous execution of two opposite orders with different dates, one of which closes earlier opened position and other opens is just after the closing order. This is basically combination of two orders of the same money amount, with different dates and opposite character.
Why to use Forex Carry Trade?
The main purpose of these operations is to keep position opened over the night. During carry trade, buying currency in currency pair conditionally adds on the deposit, while sale currency is taken on a loan. Considering that time of keeping position is not known in advance, increment of deposit and credit is achieved by taking over opened position.
When do brokers use Carry Trade
Best Forex brokers use this strategy when they work with swaps. Adding or taking off swap depends from the difference between interest rate of the deposit and the loan. If interest of deposit is higher than interest rate of a loan, swap is added to trading account. If interest rate of the loan is higher than interest of deposit, swap is taken from the balance of trading account.
Carry Trade example
As an example we will use interest rates set by central banks to calculate swap. For example, interest rate of ECB – 0.05%; and USA – 0.25%. We buy or sell 1 lot EUR/USD (in InstaForex it is up to 10.000 of basic currency, in this case Euro) at a price of 1,2702. Annual payment for swap will be ((0,05% – 0,25%)* 10.000 * 1,2702) / 100% = USD -25,404; where USD -25,404/365 = USD -0,0696 for 24 hours. If we open buying position of EUR/USD, we take a loan in dollars with annual interest rate of 0,25% and pay up deposit in Euro with interest rate of 0,05%. Loan interest rate exceeds deposit interest and thus on a daily basis from the trading account is taken 0,0696 USD. With opening of a sale position EUR/USD reverse thing happens: euro is loaned with annual interest of 0,05% and deposit is paid in US dollars with annual interest rate of 0,25%. Deposit interest is higher then credit interest rate so 0,0696 USD is added on a trading account is on a daily basis. To carry position in the night between Wednesday and Thursday, you add/take off triple swap. The reason for that is that value of position that opens in Wednesday is being calculated on Friday. During position transfer in a night between Wednesday and Thursday date of its value shouldn’t be increased for 1 day, but for 3 days, i.e. Monday. This is why swap triples.
Carry trade strategy is good for currency pair with the highest difference of interest rate such as for NZD/JPY, AUD/JPY, etc.