§ News that explosives have been found, in a car parked in the city of London, triggered a major sell-off across the most important equity markets, and as a result our carry trade portfolio gave back most of its gains for the week.
§ Even so, we did 3 profitable trades out of five and our portfolio accumulated nearly $120 on interest during the week.
§ Once again, the most profitable trade we took was the long position in the sterling.
§ On the other hand, our biggest loss was taken in the Swiss franc after hawkish comments from SNB President Roth changed the interest rate outlook for the Swiss economy.
§ The portfolio remains well balanced and no changes were done in the components of the dynamic carry trade basket.
[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
[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.