DailyFX Dynamic Carry Trade Basket: Find out how we did more than 200 pips in just 5

§ This week our portfolio was up by more than 200 pips in market value and accumulated an additional $120 gain on interest.
§ The most profitable trade was the long position we took in the sterling. Fresh expectations of further BoE tightening propelled the GBPUSD from 1.9761 to 1.9994 in just five days and we believe the pair will test the April 18 high at 2.0131.
§ Our biggest loss was taken in the Hong Kong dollar. Over the past week, the USDHKD fell from 7.8176 to 7.8135 and we are watching this pair very closely because HK short term interest rates are becoming dangerously high.
§ Foreign exchange implied volatility, which can be calculated from OTC currency options, remains close to a record low and we think the basket is well supported for the week ahead. Good Luck!

[B]What Are We Currently Long?[/B]

AUD/USD
GBP/USD
USD/CHF
USD/HKD
USD/JPY
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[B]Changes Since last week[/B]

On 6/15/2007, we closed a long position in the New Zealand dollar, to minimize the impact of more RBNZ interventions

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[B]Interest Rate Ranking[/B]
[B]Interest rates[/B]
[B]High Yielders[/B]
[B]Low Yielders[/B]
3 Month
Libor Rates
AUD
6.29%
GBP
5.90%
GBP
5.33%
HKD
4.47%
CHF
2.64%
JPY
0.69%

The Interest rate used to benchmark the currency basket is the 3 months Libor rate
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[B]Last Week?s Profit & Loss[/B] [B][/B]
[B]Open Positions[/B]
[B]Stop Price[/B]
[B]Profit & Loss ( 6/15/2007 to [/B][B]6/22/2007[/B][B] )[/B]
[B]Capital Gains[/B]
[B]Interest Received[/B]
LONG AUD/USD
0.7650
+ 84 pips
$11.90
LONG GBP/USD
1.9000
+ 231 pips
$2.80
LONG USD/JPY
114.00
+ 45 pips
$39.20
LONG USD/CHF
1.1854
- 120 pips
$58.10
LONG USD/HKD
7.7899
- 39 pips
$9.10

The Interest Received is the dollar amount received per each 100K lot left open at 5:00 PM ET.

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[B]Additional Information[/B][B][/B]

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

[B]What is Carry Trade[/B]
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.
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[B]Protective Stop-Loss[/B]
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.

[B]Position Sizing[/B]
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.