Carry trading is simply buying currencies that pay interest. In particular, it is trading with currency pairs where one currency pays a significant amount of interest compared to the other. This is a very simple strategy that can be painful if not done correctly.
How do the big guys do it?
If you have ever been a carry trader, you might ask yourself, how do big banks do carry trade. First of all the big banks are armed with much more capital than the average trader could ever hope for. That means they can pretty much do whatever they want. It's not likely that you will ever be able to trade in the same way as a bank.
The short answer as to how the big guys do it, they play games with their capital and play the market in the long and short term. They can hold on through drawdown that most of us can't even fathom.Staying in the Game
The carry trading idea is very simple. It can also be very dangerous. Currency pairs that are well suited for carry trading tend to be volatile. If you don't have experience with how to handle them, you could end up with a bankrupt account very easily.
There are two simple methods for being a carry traderMethod 1
The first method is to trade very short term. Buy on a decent dip and sell on a good rally. Trades will last a day or two or less most of the time, and if you're lucky you will be able to collect some interest during the rollover.Method 2
The second method is more of a big picture method and it's more complicated. You would use daily and weekly charts and do the same thing as the method above, buy the dips and sell some off during the rallies, but the trades would days weeks, maybe months depending on market conditions. This method requires you to trade small and make your money over time, collecting daily interest and slowly trading big into the trend.
The method that you choose just depends on your trading style and your tolerance for risk. Some traders like to try to make money quickly while taking large risks. Other traders prefer to balance risk constantly and try to make money using the big picture.
No matter what your method, there is money to be made. Carry trading is a simple and popular way to trade and make money in forex. However, it takes a bit of experience to understand how these types of currency pairs react in certain situations. It's not for the faint of heart. If you choose to make carry trading your style, just use caution and use your head.For more information see: how interest rates affect forex trading.