What Is a Carry Grid?
A carry grid is a foreign exchange trading strategy that attempts to profit from a series of simultaneous currency carry trade currency positions.
In general, grid trading is popular in forex trading and is a type of technical analysis based on placing multiple trades across similar markets.
- A carry grid involves taking several simultaneous positions in various currency carry trades.
- A carry trade is a trading strategy where you borrow at a low-interest rate and re-invest the proceeds in a currency with a higher interest rate.
- Because of the risks involved, carry grids can compound losses if multiple carry trades unravel at the same time.
Understanding the Carry Grid
A carry trade involves buying currencies (i.e. lending) with relatively high interest rates, and concurrently selling currencies (i.e. borrowing) that have low interest rates. It's an incredibly popular strategy used in the currency market
The aim of using a carry grid as a trading strategy is to capture the interest differential, or carry, between various currencies. This difference between rates can be quite significant, depending on how much leverage is used. Because the carry grid utilizes several currency pairs at once, it does offer some degree of diversification, which can reduce the risk of loss in any single position.
If currency values remain stable or there's any appreciation, carry trades can be a beneficial strategy. The major risk of employing a carry grid is that a major turnaround in the carry trade can lead to significant losses that could be exacerbated by the multiple trading positions in the trading grid.
Currency Carry Trades
Traders benefit from currency carries from the difference between interest rates of the two countries whose currencies are being exchanged, as long as their exchange rate holds steady. Popular carry trades include currency pairs such as AUD/JPY and NZD/JPY because they have very high interest rate spreads.
Generally, carry trades are most profitable for investors when central banks are increasing or set to increase interest rates. This allows for higher yields as well as capital appreciation. Also, when volatility is low, carry trades are more likely to work since traders are willing to take on more risk.
But if a shift in monetary policy includes central banks reducing interest rates, carry trades are no longer a smart strategy for traders. And when interest rates go down, currency demand also often goes down, which makes selling off a currency more difficult for traders.