DailyFX Dynamic Carry Trade Basket: 231 pips in Capital Gains

§ This week we were up by 231 pips in capital gains and received nearly $121 on interest payments
§ Most of the gains were done on the yen (98 pips) and in the Swiss franc (142 pips)
§ Last week, we closed a long position in the Kiwi to reduce our portfolio exposure to the RBNZ Rate decision. In the following Wednesday the central bank surprised the market by raising the benchmark rate by 25bps to 7.75%. The market is currently pricing two more rate hikes in 2007 and as a result we decided to resume our long term position in the NZDUSD, currently trading at 0.7410.

What Are We Currently Long?


Changes Since Last Week
Open a Long Position in the NZDUSD

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.