06-15-2007, 01:10 PM
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FX Analyst
FX-Men Honorary Member
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Join Date: Jan 2007
Posts: 10,134
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DailyFX Dynamic Carry Trade Basket: 218 pips Gain
- This week we were up by 218 pips in value, accumulated nearly $150 on interest payments and four of our six trades were profitable.
- Still, the week didn?t start in the best way for us. On Monday, June 11th, the Reserve Bank of New Zealand intervened in the foreign exchange market to sell the New Zealand Dollar. Alan Bollard, the RBNZ Governor justified this action by saying that "As stated in our June Monetary Policy Statement, we regard current levels of the exchange rate as exceptional and unjustified in terms of the economic fundamentals". We don?t think we will have a massive carry trade unwind in the weeks ahead but the most likely increase on volatility, on speculation of further RBNZ interventions, make the NZD dollar a bad trade to take at this moment. As a result of this we decided to remove the New Zealand dollar from our carry trade basket.
- Yet, our carry trade portfolio continues well supported by 5 different trades and the current market environment, with volatility close to a record low, continues to push the markets in our favor. Good Luck in Your Trading!
What Are We Currently Long?
AUD/USD
GBP/USD
USD/CHF
USD/HKD
USD/JPY
Interest Rate Ranking
The Interest rate used to benchmark the currency basket is the 3 months Libor rate
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.
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.
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