• Home ::
• Technical ::
• Forex Strategy ::
• Dynamic Carry Basket

• Send
• Print
• Add To
• Rss

Dynamic Carry Basket

97a503da-022f-4fa2-95e8-4cab4ab98aee

0

0

Carry Trade Basket Performance Update: 152 pips gain

Wed, Nov 28 2007, 06:12 GMT
by Antonio Sousa

DailyFX

Last week the DailyFX Dynamic Carry Trade Portfolio was up by 152 pips and accumulated an additional $87 per basket on interest payments. The most lucrative trade was the position we held in the Sterling with 217 pips gain in capital appreciation plus $28 on interest payments accumulated along the last 5 days. Like we said in our Watch What the Fed Watches weekly report, despite the 75 basis points cut in the overnight Fed Funds rate, credit conditions remain very tight and now have the potential to restrain economic growth more generally. A situation that could favor a further unwind of carry trades and benefit lower yielding currencies like the Japanese yen.

Additional Information

In an ever changing world, making profitable carry trades* (definition below) are not as easy as they use to be. Therefore we have created a dynamic carry basket that changes when the monetary policy outlook for a central bank changes or if there is significant event risk ahead. Follow the performance of the DailyFX Dynamic Carry Trade Basket

What is Carry Trade

All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Money shifts from around the world in seek of the highest yield and the benefit of trading currencies is that you are dealing with countries that have interest rates, which are charged or received every single day. If you are positioned on the side of positive carry, you have the right to earn that interest, which can be quite lucrative over time.

Protective Stop-Loss

Substantial gains made from interest rate differentials provide undeniable evidence that the carry trade strategy has been very successful over the past few years. Still, this strategy involves significant risks and an adequate protective stop is required. We are using a protective stop-loss equivalent to five times the average true range. Stop losses are activated when we have a weekly close below the specified stop level.

Position Sizing

Our position size varies according to each currency volatility. Generally, the more volatile the currency is, the fewer lots we trade. For example, let's assume you have $10,000 and you are trading 10K lots, you decide to limit your risk per trade to 3% or $300 and the 90 days average true range for the EURUSD is 100 pips. In this case, if you go long EUR/USD you could buy 3 lots, since ($10000 * 3%) divided by (0.0100*10K) = 3 lots. In case the final result is not an integer you should always rounded it down to limit your exposure.

Published on  Wed, Nov 28 2007, 06:16 GMT