Carry Trade

A carry trade is a trading strategy where a trader borrows money in a currency with a low interest rate and uses that money to buy a currency with a higher interest rate. The goal is to earn a profit from the difference between the two interest rates, known as the interest rate differential. In Forex trading, this is often done by holding a currency pair overnight and receiving a daily interest payment, called a swap or rollover, if the interest rate of the currency you bought is higher than the one you sold.

Carry trades are most effective in stable market conditions when price movements are not too volatile. However, they can also be risky because sudden changes in exchange rates can wipe out the profits from the interest payments. Additionally, if the central banks change interest rates or if market sentiment shifts, the value of the carry trade can quickly turn negative. Traders who use carry trades must carefully manage their risk and stay informed about global economic news that could impact interest rates or currency values.

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