Carry Trade Basket Up By 583 pips

This week, the Dynamic Carry Trade Basket was up by nearly 583 pips in value and accumulated more than $150 on interest payments. The most profitable trade was the long position we took in theSterling with 149 pips gain. On the other hand, the biggest loss was taken in the short position we held in the Hong Kong dollar with a 127 pips drop.

Foreign exchange volatility remains at historical highs across the components of the carry trade basket. Yet, we believe the basket is well balanced for the week ahead and no changes were done in the current portfolio. In fact, USDJPY volatility as implied by one month over the counter FX options is much lower than it was during last week’s carry unwinding (graph below) and this more stable environment should make carry trade eye catching for many investors.

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


USDJPY volatility as implied by one month over the counter options is much lower than it was during last week’s carry unwinding.

[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.
[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. Stop losses are activated when we have a weekly close below the specified stop level.

[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.