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carry trades
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Old 12-08-2007, 12:33 AM
FXharpoon FXharpoon is offline
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Default carry trades

There are really 2 different meanings of the term "carry trade". Among those of us who trade in Forex it can mean that you are holding a trade overnight for a period of more than one day and in that case you are charged or credited the interest rate differential between the 2 currency pairs. However, many brokers make up their own interest rates so that they are consistently over twice as high on the negative side as on the positive. Very few brokers have interest rates that actually represent the difference between the 2 countries' interest which obviously would be equal on the positive and negative side because it is a difference between 2 numbers.

In the financial world that extends beyond our niche of spot Forex, "carry trade" refers to all the investments among large funds and institutions in which they hold a currency to earn that interest over time. Apparently their investments may not be spot Forex currency pairs but could be the actual currency or other investments that are tied to that currency. Someone more knowledgable about that area could explain it better but for practical trading purposes in spot Forex a "carry trade" can just mean a trade that is held for more than one day in which interest is charged or credited. Interestingly the majority of traders only hold trades for less than one day, but I normally only enter a trade for a minimum of 3 days.
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