Free Trading School · Level 11: Sentiment, Intermarket and Divergence
The carry trade and swaps
When you hold a currency position overnight, you earn the interest rate of the currency you bought and pay the rate of the currency you sold. Your broker credits or debits the difference daily as a swap (rollover).
If currency A pays 5% and currency B pays 1%, buying A against B earns roughly the 4% difference per year on the position size, before broker markups. With leverage, that interest can be significant, which is why large funds run carry trades.
- Carry trades do well in calm, risk-on markets.
- They unwind violently in risk-off periods, when everyone exits at once.
- Check swap rates before holding leveraged positions for weeks; negative carry slowly eats profits.
Interest differentials pay you to wait in calm markets and punish you when fear returns.
Quick answers
When you hold a currency position overnight, you earn the interest rate of the currency you bought and pay the rate of the currency you sold. Your broker credits or debits the difference daily as a swap (rollover).
Interest differentials pay you to wait in calm markets and punish you when fear returns.
The interest difference paid or earned on overnight positions. Holding overnight earns or pays the rate differential.
Next lesson: Divergence: when momentum disagrees with price