Swaps & the carry trade

Green Call here. 💰 Money sitting in a bank earns interest. Here is the thing beginners rarely realise: so does a forex position. Behind every currency sits an interest rate set by its central bank, and when you trade a pair you are holding one currency and owing the other. Earning on one, paying on the other. That gap is the whole lesson.

The swap: paid or charged overnight

Forex has a daily cutoff called rollover, usually 5pm New York time. Hold a position past it and your broker applies a swap — the interest-rate difference between the two currencies in your pair.

Hold the higher-yielding currency and you earn a small positive swap each night. Hold the lower-yielding one and you pay a negative swap. Close before rollover and nothing is applied at all — which is why day traders can ignore this entirely and swing traders cannot.

The carry trade

Once you see that swap can be positive, the strategy writes itself. The carry trade buys the higher-yielding currency and sells the lower-yielding one, so a positive swap lands in the account every single day the position stays open.

The dream version is getting paid the carry *and* watching the pair drift in your favour on top. You are being paid to wait — which is an unusual and seductive thing in a market that normally charges you for everything.

A simple example

Say Currency A's central bank pays 5% and Currency B's pays roughly 0%. Go long A and short B, and you collect about that 5% gap, drip-fed night by night.

Leverage magnifies it in a way that surprises people. Control a $100,000 position with a small margin deposit and the daily carry is calculated on the full $100,000 — not on your deposit. A modest edge on a leveraged position adds up fast.

The carry unwind

Now the part that decides whether this strategy is clever or catastrophic. The carry hums along beautifully in calm, confident *risk-on* markets. Everyone is happy to hold the high-yielder, and the swap trickles in.

Then fear arrives. The crowd bolts for safety all at once and dumps their carry positions together — a carry unwind. The high-yielding currency can crater in days, erasing months of patient swap income in a single panic. And the same leverage that magnified your daily carry magnifies the crash at exactly the same rate.

The carry pays you slowly, then takes it back all at once. Size the position for the second part, not the first.

Collect the carry if the setup earns it. Just never confuse "has not gone wrong yet" with "cannot go wrong". 🌙