From the September 01, 2011 issue of Futures Magazine • Subscribe!

How to trade the carry trade

Carry trades always have been a popular strategy for forex traders. The idea is not complicated. In a carry trade, traders sell currencies yielding low interest rates vs. currencies with a higher interest rate. These are medium- to long-term trades, as the spread between interest rates changes infrequently.

Unfortunately, although simple in execution, a profitable carry trade is a bit more sophisticated than simply selling a low interest rate currency, like the yen, against a high yielder, such as the Australian dollar (see "Yen for Aussie," below). While this trade indeed can work consistently, you need to understand the intricacies of what's occurring to protect your profits. Let's see why.

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