Are you looking for the best forex broker to carry trade because you’re looking to take advantage of different interest rates in the forex market?
We can help you.
The carry trade is a big deal and when leveraged correctly at the right time can yield great results. But not all brokers allow traders to take advantage of this.
On top of that, you also shouldn’t just sign up to the first broker that allows you to carry trade, you should consider what other benefits they can also give you too, such as high-quality trading tools and exceptional liquidity.
That’s why we made this list.
Top 10 of the best forex brokers to carry trade for 2020
Here’s our ranking.
What is the Forex Carry Trade?
A carry trade in forex may sound complex, but is actually not too complicated, and another potential way to profit. It is in fact a trading strategy which involves two currencies. One of these is what is considered a high interest currency, the other, a low interest currency.
As a carry trader, you will attempt to borrow at a low interest rate, and invest this money in a place that returns a high interest rate, in this case, all in the form of foreign currency pairs. By borrowing a pair at a low interest rate, and investing in a pair with a high interest rate, you should be able to exploit the percentage difference as profit.
Forex Carry Trade Example
As a simple carry trade example, let’s imagine that you borrow a low interest currency (LIC) at an example rate of 1%, and you use that to buy into a high interest currency (HIC) that earns typically 3%. You should expect a 2% profit. to illustrate this example:
With an exchange rate of 10.00:
100 LIC will purchase 1000HIC.
After a period of time, the HIC gains 3% to 1030.
The LIC gains 1% to 101.
With the exchange rate remaining unchanged, you would now have 1030 HIC which converts back to 103 LIC representing a 2 LIC profit, or 2%.
Of course, the interest rates may change during this time. This can certainly lead to fluctuation in profits and losses that you need to be mindful of. The above example is put forward in the table below:
|TIMEFRAME||LIC (1%)||HIC (3%)|
|Let’s buy HIC with LIC||100||→||1000|
|After the interest||101||1030|
|Let’s get the LIC back||103||←||1030|
|Gains||103 – 101 = 2 LIC|
How to find the best forex carry trade currencies for 2020
Now that you know some of the background and basics surrounding carry trading, how do you find the best currencies to carry trade? Here are a few tips:
- Find two potential forex currencies
The first step is to find two currencies that fit the criteria. This means that the interest rate of the currency you borrow, should be lower than the one you are intending to buy. The bigger the gap, the more improved the potential for a great carry trade.
- Find the relative forex pair, and take a look at the chart
If you have found two currencies you think fit the bill, you then need to be sure. This means studying the charts at that moment to exploit any ongoing trend in either direction. If this kind of trend is not showing, then you are better to wait and not enter a carry trade with these currencies.
Carry Trade Pros and Cons
As with every type of trading, there are a few positives and drawbacks with carry trades. Here are a few of note:
- The carry trade is very flexible in the sense it can apply to any number of currencies moving in either direction. A wealth of opportunity.
- Like many forms of trading, a carry trade relies on, and rewards your knowledge and awareness of the markets and current trends.
- If the interest rate changes at any point during your trading process, then it can ruin the entire trade and the profitability you spotted.
- Carry trading is not suitable for those Islamic traders who wish to remain compliant with Shariah law.