Carry trade explained:earn the difference.
The carry trade explained: you borrow in a currency with low interest rates and hold a currency with higher rates. You earn the difference every day you hold it.
It works quietly for months, and it unwinds fast when fear hits.
Why it works
The rate difference pays you to hold the position. When many traders do the same, the flows push the high-rate currency up too.
Why it fails
In risk-off, everyone closes at once. The low-rate currency, often the yen, jumps. Months of carry can disappear in days.
Use it in real trading
The tool informs the decision, it never makes it. Here is how it plays out on real trading days.
Risk-on and a wide rate gap. USDJPY drifts higher for weeks.
Stocks sell off hard. USDJPY drops 5% in days as carry trades close.
Mistakes to avoid
- Ignoring risk mood.
- Using too much size because the move is slow.
- Forgetting that rate gaps can shrink.
What makes it different
Risk Sentiment, rate spreads and COT positioning show you both the reward and the crowding.
Questions
Which currencies fund carry trades?
Usually low-rate currencies like the yen or the franc.
What ends a carry trade?
Risk-off, or a shrinking rate gap.
Is carry only for long-term traders?
It suits swing traders best.