What is carry trading?

Carry trading is one of the most simple strategies for currency trading. A carry trade is when you buy a high-interest currency against a low-interest currency. For each day you hold that trade, your broker will pay you the interest difference between the two currencies, as long as you are trading in the positive interest direction.

For example, if the pound (GBP) has a 5 percent interest rate and the dollar (USD) has a 2 percent interest rate, and you buy or go long on the GBP/USD, you are making a carry trade. For each day you hold that trade, the broker pays you the difference between the interest rates of those two currencies, which would be 3 percent. This can add up over time.