💱 Carry Trades in the Forex Market
In forex, currencies are always traded in pairs.
For example, buying USD/CHF means you’re buying U.S. dollars and selling Swiss francs at the same time.
Here’s the key:
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You pay interest on the currency you sell
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You earn interest on the currency you buy
In spot forex, this interest—called the rollover or carrying cost—is calculated every trading day.
Even though it doesn’t look like it on your platform, brokers technically close and reopen your position each day, crediting or debiting the interest rate difference between the two currencies.
📈 Why Carry Trades Are Popular in Forex
Forex brokers often offer high leverage, meaning you only put up a small percentage of the trade’s value while the broker covers the rest.
Some brokers require as little as 1% margin—and this magnifies the potential returns from interest rate differences.
🧮 Carry Trade Example: Meet Joe
Joe gets a $10,000 birthday gift from his grandparents.
The bank offers him 1% a year—just $100 annually.
Joe thinks, “That’s not going to cut it.”
After learning about forex, he opens a trading account and spots a currency pair with a +5% interest rate differential.
He buys $100,000 worth of that pair using 100:1 leverage (only $1,000 of his own money is held as margin).
Here’s what could happen after one year:
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Price Drops – If the pair falls sharply, Joe could lose enough to hit his margin, leaving him with just $1,000.
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Price Stays the Same – Joe keeps the position for a year and earns 5% on $100,000—that’s $5,000 interest on his $10,000 account (a 50% gain).
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Price Rises – Joe earns the same $5,000 interest plus any profit from the price increase.
That’s the power of the carry trade with leverage: potentially big percentage returns on relatively small capital.
📊 Real-World Example (2010 Rates)
If you bought AUD/JPY back in September 2010, you could earn about +4.40% in positive carry over a year.
If you sold it instead, you’d pay -4.40%—a negative carry.
The concept is simple: earn from the interest rate gap and possibly from price movement.
But before you jump in, it’s time to cover the most important topic… Carry Trade Risks.
If you’d like, I can also make this more visual and flow-based so it’s perfect for a forex training course or PDF guide. That would make Joe’s example even easier to follow. Would you like me to do that?