This week, the Dynamic Carry Trade Basket was down by nearly 336 pips in value. Exchange rates volatility remains very high and as a result Traders appetite for risk has been very weak. The biggest losses were taken in the long position we held in the U.S. dollar against the Japanese yen (-127 pips) and in the short position we took in the Swiss franc (-202 pips). On the other hand, the most profitable trade was the long position we took in the Sterling with 117 pips gain. Finally, for the week ahead, no changes were done in the current portfolio. The market is already pricing in a lot of Federal Reserve easing and the upcoming FOMC meeting has a strong chance of surprising market participants to the upside. Good luck with your trading!
Making profitable carry trades 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.
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.
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.