Carry trade explained simply

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In short

In a carry trade the income does not come from the price move but from interest. Buying a currency with a high rate against one with a low rate earns a small credit from the broker every night: the swap.

In the schematic the swap counts as closed result, bar by bar. The dashed line shows the break-even: entry minus swap. It falls slowly. If price falls faster than this line, weeks of income are gone in a few bars.

Which costs hide in a trade log and how to read them is explained in Trading metrics: drawdown and profit factor. How large a position may be with a wide stop is covered in Position sizing and risk per trade.

The strategy as a schematic

A drawn price path, no market data. First the case where the rule works, then the same routine when it fails.

Closed: ±0 pips
Open: –
Open volume: –

Schematic, no market data: a drawn price path, results in pips weighted to 0.10 lots. Not a backtest and no statement about any real EA.

How the strategy trades

Pick a currency pair with a large interest-rate gap and buy the currency with the higher rate.
Hold the position for weeks or months. Every night the broker credits swap, as long as it is positive.
Swap shifts the break-even point: every day price may fall a little further below the entry before the position is negative overall.
A wide stop or loss limit caps the damage if the exchange rate falls hard.
Exit on plan, when the rate gap shrinks, or at the stop.

Where the risk sits

Swap is small and comes every day; the price move is large and comes rarely, but then fast. In crises many traders sell high-yielding currencies at once (carry unwind). One such drop can exceed months of swap income within days.

Swap is not fixed. Brokers derive it from both currencies' rates minus their own mark-up and adjust it constantly. If a central bank cuts rates, the income shrinks or turns negative while the position stays open.

Leverage makes both stronger. Sizing the lot by the swap rather than by the possible price move underestimates the risk. Swap-free (Islamic) accounts do not pay the income at all.

When it works, when it fails

Tends to work when …

Calm markets in which the exchange rate moves sideways or rises slightly.
A stable, large rate gap over the whole holding period.
A lot size that survives a sharp drop.

Tends to fail when …

A fast drop in a crisis or after a central bank surprise.
Rate cuts that shrink the swap.
A broker with a high swap mark-up, leaving little net income.

How to recognise it in an EA

Traces in the trade log of a live account, whatever the vendor calls the EA.

Very long holding times, often weeks to months, with few trades.
Positions almost always in the same direction on pairs with a large rate gap.
A large share of the result comes from swap entries, not from the price move.
An equity curve that rises slowly for a long time and then falls steeply in a short time.

Typical settings

Setting	Typical	Effect
Pair	high-rate currency against low-rate currency	The rate gap changes with monetary policy.
Swap per night	set by the broker	Check before entering; it can be negative.
Stop / loss limit	wide, often 100–300 pips	Caps the damage in a sharp drop.
Lot size	small relative to the account	Sized by price risk, not by swap.

Common ranges from EA manuals and set files, not a recommendation.

EAs in our tests built this way

No EA in our tests is explicitly tagged with this design yet. Many EAs combine it with other mechanics; the trade log usually shows it sooner than the product description. All EA reviews →

All strategies →All designs compared: EA strategies explained →

Frequently asked questions

What is a carry trade?

Buying a high-yielding currency against a low-yielding one to earn the interest-rate gap. In a forex account this income comes as daily swap. The exchange-rate risk stays the whole time.

How does the broker calculate swap?

From the interest rates of both currencies minus its own mark-up. It is usually booked once per night, often triple on Wednesday to cover the weekend. The values are in the broker's contract specifications and change constantly.

What is a carry unwind?

A phase in which many investors close their carry trades at once, usually in a crisis. High-yielding currencies then fall fast and hard, and the price loss clearly exceeds the swap collected.

Video: the strategy in under a minute

The same animation as a video with subtitles, for those who prefer to watch.

The carry trade explained simply