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What is the meaning of carry trade - Forex Trading

What is the meaning of carry trade

Carry trade is a strategy through which a trader borrows a currency in a low interest country,
converts it into a currency in a high interest rate country and invests it in high grade debt securities of that country.
Investors who follow this strategy borrow money at a low interest rate to invest in a security that
is expected to provide higher return.

Carry trade allows to make a profit from the non-volatile and stable market, since here it rather
matters the difference between the interest rates of currencies; the higher the difference, the greater
the profit. While deciding what currencies to trade by this strategy you should consider the expected
changes in the interest rates of particular currencies.

The principle is simple- buy a currency whose interest rate is expected to go up and sell the
currency whose interest rate is expected to go down.

However, this does not mean that the price changes between the currencies are absolutely unimportant. Thus, you can invest in a currency because of its high interest rate, but if the currency price
drops and you close the trade, you may find that even though you have profited from the interest
rate you have also lost from the trade because of the difference in the buy/sell price. Therefore, carry
trade is mostly suitable for trendless or sideways market, when the price movement is expected to
remain the same for some time.

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