The DailyFX Dynamic Carry Trade Basket is up by 415 pips since last week and accumulated more than $150 on interest payments. The most profitable trades were the long position we took in the Australian dollar with 312 pips gain and a long position we held in the Sterling (259 pips). On the other hand, the biggest loss was taken in the long position we held in the Swiss franc (150 pips). Moreover, stop loss orders were triggered both in the Swiss franc and Hong Kong dollar. Finally, this week we decided to open a long position in the kiwi with a stop in a weekly close below 0.6500. We believe the sharp decline in the New Zealand dollar since July will act as a significant boost to the economy and we expect the effects of higher commodity prices will soon be translated into stronger exports.
Good luck with your trading for the week ahead!
[B]Additional Information[/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. 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.