Carry Trade Strategy: Earn While You Sleep
A carry trade strategy that earns daily interest differentials by going long high-yield currencies against low-yield funding currencies.
Carry Trade Strategy: Earn While You Sleep
Overview
The carry trade borrows (or shorts) a low-interest currency to invest in a high-interest currency, collecting the positive swap differential daily. It's a long-term strategy — the carry accrues as long as the position is held and the exchange rate doesn't move against you.
Setup
- Funding currencies (low yield): JPY, CHF historically
- Target currencies (high yield): MXN, BRL, TRY, AUD, NZN
- Timeframe: weekly or monthly hold
- Indicators: 50-week SMA, 200-week SMA (trend filter), interest rate differential table
Entry rules
- Identify a positive carry pair: target currency yield − funding currency yield ≥ 3%
- Confirm the weekly trend is in your favor (price above the rising 50-week SMA)
- Wait for a pullback to the 50-week SMA or 200-week SMA
- Enter long on a weekly close confirming support
- Confirm carry is positive on your broker's swap table
Stop loss rules
- Stop: below the 200-week SMA on a closing basis
- Maximum risk per trade: 1–2% of account (carry trades run wide stops)
- Exit if the central bank of the target currency signals rate cuts
Take profit rules
- No fixed target — carry accrues as long as the position is open
- Trail the stop under the 50-week SMA
- Exit on a clear regime change: weekly close below the 200-week SMA
- Optional: scale out 25% after a 10% gain in price
Risk management
| Parameter | Value |
|---|---|
| Risk per trade | 1–2% of account |
| Max concurrent carry trades | 3 |
| Position size | Risk ÷ (entry − stop) |
| Diversification | No two trades on correlated pairs |
| Currency crisis rule | Exit if target currency falls > 8% in a week |
Use the position size calculator to size each carry position based on the weekly stop distance.
When it fails
- Currency crises: sudden devaluations wipe out years of carry in days (e.g., 2008 JPY crosses)
- Risk-off episodes: funding currencies (JPY, CHF) spike as carry trades unwind
- Rate cut surprises from the target central bank
Key principle
Carry pays you to be patient — until it doesn't. The differential looks small but compounds daily. The risk is the exchange rate, not the interest. Always trade carry with the weekly trend, never against it.
Strategy is for educational purposes only. Not financial advice.