Who actually pays you the interest if you’re in a carry trade and why do they do it?
For all practical purposes it’s the person on the other side of your trade.
What is a carry trade exactly? Not sure i’m 100% sure…
Have you done the BabyPips School? If not, check it out & if you are currently doing it: you’ll come across it soon enough & it’ll be explained better than the below.
A carry trade is when you trade a currency pair in which the 2 countries have interest rate that are vastly different. For example (not market figures), if the JPY has an interest rate of 0.1% and the AUD is 5% then the difference is 4.9%. So when trading the AUD/JPY you want to be looking to go long when the market is bullish - you want to be buying the AUD & therefore selling the JPY. In doing so, you will be paying the interest rate of 0.1% on your investment but getting paid 5% - so you will be earning 4.9% (interest-rate differential).
So if you bought 1-standard lot ($100,000) & price didn’t move for the entire year, you would earn 4.9% interest on that trade so you would be £4,900 up even with price not moving. Obviously the aim is to catch the upwards trend to earn profits & the added interest is just a bonus.
This only works when the AUD/JPY is trending upwards. If the market is bearish & you sell, then the opposite occurs: you will be paying 5% interest & only earning 0.1% so you are actually having to pay interest (the 4.9% interest-rate differential) to keep the position open. You will make mon£y by riding the downwards trend but profits will be off-set by the interest that you will be paying.
I hope that this makes sense & that it helps you out Aesop.
Wow Baz, you are just steaming with your bank of knowledge… You clearly went to all classes!!! I’ve also finished school but am currently going through my notes (that I made in going through all the classes); it’s actually quite amazing how much I’ve learned/remembered in my 4 weeks here so that’s good 
But I’m way behind you Well done my friend…
I’m still a Newbie but I’m a seasoned one at that now. It’s great no longer being the new kid on the block:) Although I took my time doing BabyPips School, I pick up things really quickly & grasp them really well - I’m very lucky in that respect. Now applying all the theory will be my biggest hurdle.
Due to my long boring days at home not being able to do much, I told myself that for every 5 demo trades that I do, if I’m in the mon£y then I’ll do one live trade. And as of today…(~drumroll please~)…I am a successful trader:D Bagged myself 90pips - it was only a 0.01 lot so I’m not busting out the Dom Perignon just yet but it’s a start. When I earn myself another live trade, that “successful trader” title may be blown out of the water but fingers crossed my judgement is good.
Happy trading everyone!
Carry Trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.
P.S. This definition is from Investopedia!!
I couldn’t of asked for a better explanation than that, Cheers!