FOREX carry interest can either work in your favor, or against you.

What is carry interest?

Look at it this way: If you borrow money from a bank, you owe them interest, however if you deposit money in the bank then they owe you interest.

The same is true in the FOREX market where the interest on one currency in the pair is higher than the interest against the other when you carry the trade over from day to day.

Carry Interest

The difference between this interest debit and credit is called the pair’s carry interest. Carry interest can be positive or negative depending on the pair, and whether you are long or short that pair.

If you’re trading minis, or even a small account, then carry interest is minimal. However, if you trade with size, and hold the position for a long time that interest can be significant, either in a positive or a negative way.

For example, I just closed a large position that I had held for several months, and the interest I ended up paying was $2,200. And that took a significant chunk out of my $7,800 profit on the trade!

So, carry interest is definitely something you should keep in mind when trading with size and carrying positions for long periods of time.

Of note is that to this post, I have a companion video of the same title: Be Aware Of FOREX Carry Interest Issues that puts all of this together from a different view point.

If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

As an example, let's say you make a FOREX trade with the classic AUD/JPY pair. I'll use this pair because AUD characteristically has had a very high interest rate relative to JPY. When you make a long trade, you're buying AUD and selling JPY. Conversely, when you go short you're selling AUD and buying JPY. Terrific....

Let's say AUD interest is 4% and JPY interest is 1%, just to put some numbers to this. So, when you go long AUD/JPY you're earning the AUD 4% interest and paying the 1% JPY interest. That differential in AUD interest minus JPY interest, or 3%, is called the carry interest. Because you're position is long, you make 3% interest, but if you go short AUD/JPY, the opposite occurs and you pay 3% interest.

Those interest values are per year, so to get the daily gain or loss, divide by 365. Simple.

As an exercise, take both a long and a short trade of 5 full lots AUD/JPY, and calculate out the daily interest gain and loss on those 5 full lots to compare the results. Those results are not inconsequential on a daily basis, let alone carrying the trades out for say, 3 months....

As the old real estate saying goes: "caveat emptor", i.e. 'Let the buyer beware.'

Another thing to consider is that the interest rates on either currency could fluctuate thus changing the gain or loss accordingly.

And finally, this post only discusses the effect of carry interest on the retail trader. At the institutional level, money is made via interest rate arbitrage, a topic you can investigate on your own if you want your head to hurt.

Video: Be Aware Of FOREX Carry Interest Issues