Cost of Carry Forex: Complete Trader's Guide to Overnight Positions

Introduction: What and Why

　　Think of the cost of carry as the "cost of holding" an asset.

　　It's like when you store gold and pay for things like storage and insurance. Holding a forex position also has costs or benefits. This is not just theory but a real financial fact.

　　In forex, the cost of carry is what you pay or earn from keeping a currency pair overnight. It comes from the interest rate difference between the two currencies in the pair.

　　The idea is simple and has two parts. First, you earn interest on the currency you bought. Second, you pay interest on the currency you sold.

　　The cost of carry is the difference between these two amounts.

　　This directly affects how much money you make trading. Day traders don't worry much about it, but anyone holding positions longer than a day needs to pay attention to this important factor.

The Interest Rate Engine

　　To understand the cost of carry, we need to look at its source: central banks.

　　Every major currency has an overnight interest rate. Central banks like the Federal Reserve, European Central Bank, or Bank of Japan set these rates.

　　These rates determine how much it costs to borrow that currency.

　　In forex, you always trade one currency for another. When you buy AUD/USD, you're buying Australian Dollars and selling US Dollars.

　　This connects your position to interest rates in Australia and the United States. You earn the Australian interest rate and pay the US interest rate.

　　This creates two possible situations: positive carry and negative carry.

　　Positive carry happens when the interest rate on the currency you bought is higher than the rate on the currency you sold. When this happens, money gets added to your account each day you hold the position overnight.

　　Negative carry is the opposite. It occurs when the interest rate on the currency you bought is lower than the rate on the currency you sold. This takes money from your account daily.

　　The table below shows this idea with example rates.

　　Understanding this is basic. It shows how central bank decisions directly affect your trading account each day.

The Calculation Toolkit

　　Most trading platforms calculate the cost of carry for you. You'll see it as "Swap" or "Rollover Fee" on your account statement.

　　While this is handy, knowing how the math works is important. It helps you check your broker's charges and build better trading plans.

　　The formula is simple. You calculate the yearly interest difference and then find the daily amount.

　　The formula looks like this:

　　Daily Rollover Debit/Credit = (Interest Rate Differential / 365) * Notional Value

　　Let's walk through an example to make it clear.

• 　　Identify the Pair and Position: We go long 1 standard lot (100,000 units) of AUD/JPY. We're buying Australian Dollars and selling Japanese Yen.

• 　　Find the Interest Rates: We need the current rates for both currencies. For this example, we'll use late 2023 rates: Australia = 4.35%, Japan = -0.10%.

• 　　Calculate the Differential: Subtract the short currency's rate from the long currency's rate. 4.35% - (-0.10%) = 4.45%. This gives us a good positive carry.

• 　　Calculate the Annual Interest: Apply this percentage to the amount of currency we're long. 100,000 AUD * 4.45% = 4,450 AUD. This is what we'd earn in one year.

• 　　Calculate the Daily Interest: Find the daily credit by dividing the yearly amount by 365. 4,450 AUD / 365 days = 12.19 AUD per day.

• 　　Convert to Your Account Currency: This 12.19 AUD will be added to your account. If your account uses a different currency like USD, your broker will convert it.

　　Be aware of a few details. Brokers often add their own fees to the interest rate difference, which can reduce your positive carry or increase your negative carry.

　　Also, watch for weekend rollovers. Since markets close on weekends, positions held over Wednesday night usually get charged three times to cover Saturday and Sunday. The exact day may vary by broker.

　　

Integrating into Strategy

　　The cost of carry isn't just for long-term traders. All traders should view it as a basic factor, like spreads or market movement.

　　Using this concept in your analysis can give you an edge.

　　For swing or position traders, the cost of carry can be a powerful tool. It can help you decide between trades. When two trades look equally good based on charts, the one with a positive carry is often better.

　　A positive carry gives you a safety cushion. The daily credits can offset small price drops, giving your trade more room to work. It makes small losses less stressful.

　　When looking at a multi-week trade on EUR/USD versus AUD/JPY, we check more than just charts. We look at current central bank rates. If AUD/JPY offers a good positive carry and the charts look bullish, it becomes more attractive. That daily credit adds up over 30 to 60 days and can protect against small pullbacks or add to your final profit.

　　For day traders, the daily cost matters less. But awareness is still key. Holding a position with high negative carry overnight is an unnecessary cost that cuts into profits. Good day traders close such positions before the cutoff time.

　　The cost of carry also matters for hedging. If you hedge one position with another currency pair, the combined carry cost is the true daily cost of your protection. Ignoring this can slowly drain your account.

　　Here are strategic ways to use the cost of carry:

• Use positive carry to choose between similar trade setups.
• See positive carry as a buffer against small price changes.
• Avoid keeping high negative carry positions overnight unless the charts are very strong.
• Calculate the total carry cost when hedging to understand the true expense.

　　

Risks and Advanced Concepts

　　While positive carry can boost returns, focusing only on it is a common mistake for new traders. A balanced view requires understanding the risks.

　　The first and most important rule is this: price movement is king.

　　A large price move against you can wipe out months or even years of positive carry profits in one day. Your main risk is always losing money from price changes, not the small daily cost or credit from carry.

　　Next, traders must know about the Interest Rate Parity trap.

　　The theory suggests that a currency with a high interest rate will lose value against a currency with a low interest rate. This drop is supposed to balance out the interest advantage.

　　While this theory doesn't always work in real markets—which is why carry trades can be profitable—it shows an underlying pressure. A positive carry often means the market is paying you to take on higher risk, including the risk of currency value drops.

　　Central bank policies change, creating another risk. A surprise interest rate cut can hurt a carry trade badly. It reduces your positive carry and usually causes a sharp drop in the currency's value.

　　Finally, consider market mood and liquidity. During times of financial stress, or "risk-off" periods, investors behave differently. They sell high-yield "risky" currencies like the Australian Dollar and buy "safe" currencies with low yields, like the Japanese Yen.

　　This rush to safety causes popular carry trades, like long AUD/JPY, to collapse quickly, leading to big losses for traders on the wrong side.

　　Keep these key risks in mind:

• Capital Risk > Yield Gain
• Unexpected Policy Changes
• Market Sentiment Shifts (Risk-Off)
• Currency Depreciation Risk

　　

Conclusion: Making It Work

　　Understanding the cost of carry separates new traders from more advanced market participants. It moves you beyond simple chart patterns into understanding economic fundamentals.

　　By grasping this concept, you get a more complete picture of what affects your trades.

　　Let's review the main points.

• The cost of carry is the net interest you earn or pay for holding a forex position overnight.
• It comes from the interest rate difference between two currencies, set by their central banks.
• It can be a source of profit (positive carry) or a cost (negative carry).
• You must always prioritize good technical analysis, price action, and risk management over chasing yield.

　　By including cost of carry analysis in your trading routine, you add another professional layer to your decisions. This deeper understanding doesn't guarantee profits, but it helps improve your long-term edge in the competitive forex market.