What is a Carry Grid
A carry grid is a foreign exchange trading strategy that attempts to profit from a grid of carry trade currency positions.
BREAKING DOWN Carry Grid
A carry grid involves buying currencies with relatively high interest rates, and concurrently selling currencies that have low interest rates. This strategy reflects the idea of buying low and selling high.
It’s an incredibly popular strategy used in the currency market. Trading strategies generally specify rules for making trades including information about entries, exits and money management.
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. Sometimes, multiple carry trade positions that are part of a carry grid can help reduce losses because of unforeseen events.
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.
In general, grid trading is popular in foreign exchange trading and is a type of technical analysis based on movements within specific grid patterns.
Carry Grids and Currency Carry Trades
A carry grid is a type of strategy that involves a grid of currency carry trades. Currency carry trades are a strategy where a high-yielding currency funds the trade with a low-yielding currency. To most successfully use a currency carry trade, traders must first determine what currencies offer a high yield and which ones offer a low yield.
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, often, currency demand also goes down, which makes selling off a currency more difficult for traders.
If currency values remain stable or there’s any appreciation, carry trades can be a beneficial strategy.