FX Strategy

Discussions about trading the Forex markets.
Post Reply
Bollinger
Senior Member
Senior Member
Posts: 40
Joined: Wed Apr 16, 2003 2:42 pm
Location: New York City

FX Strategy

Post by Bollinger » Mon Feb 02, 2004 4:45 pm

I'd like to discuss a strategy I've combined with my commodities long-term trendfollowing this last 4 months. It has been quite a profitable strategy over that time, and the combination with commodities trendfollowing has yielded 4 profitable months over that time.

I'll give a quick overview of my beliefs and FX trading strategy. The FX strategy is similar in some ways to the GCP program of FX Concepts, although their's lost 2% in January while mine made roughly 4%. See www.fxconceptsonline.com for more information on their strategies.

Principles system is based on:
-- Over the long term, high interest rate currencies appreciate against low interest rate currencies.
-- An appropriately designed trendfollowing system using a very long lookback period and buying or selling breakouts and exiting trades upon return to the moving average will be profitable over time if it is applied to a diversified portfolio of many markets and takes roughly equal-sized bets in each market.
-- A very long term system with infrequent trading minimizes the costs of slippage and commissions and therefore increases the profitability of the system.

That being said, I scan through many different currency crosses to determine which ones are moving in which directions. I do this using my Bloomberg terminal, which lets me look at literally any currency that I want. It also lets me choose from exotic crosses, examine short-term interest rates in each country, and compare volatility of different crosses.

I then settle on 5-8 currency crosses to open trades in. These crosses will have large interest rate differences in favor of the currency I buy. That means I'll be earning a nice carry throughout the course of the trade. The cross will also be trending in the direction of the currency I buy on a very long-term basis.

I then use Currenex to open the positions. Currenex lets me go to banks with a contract and let them compete against each other for prices. This is a wonderful tool for the trader -- I frequently see 1 pip spreads for EUR/USD spot. But I am doing forward contracts on relatively exotic crosses, so I request the banks for quotes and those and select the best that comes back. I generally do 3 month forwards for these.

How big a position do I open? I look at the volatility of each cross and equally weight each one based on the relative volatility. That means for a more volatile cross I have a smaller position on and for a less volatile cross I have a bigger position on.

My current positions are as follows:

Long Slovakian against Swiss (SKK/CHF)
Long Brazilian against Mexican (BRL/MXN)
Long Aussie against Singapore (AUD/SGD)
Long Kiwi against Japanese (NZD/JPY)
Long Hungarian against Norwegian (HUF/NOK)
Long Turkish against US (TRL/USD)
Long British against Taiwanese (GBP/TWD)


I hope everyone finds this interesting and helpful. I love this strategy and it's been quite profitable for me since I started trading it 3 months ago. I also combine it with a similar strategy trading commodity futures, and my research has shown that the combination should improve risk-adjusted return. FX Concepts has achieved sharpe ratios of 2+ with its strategies and I think this is quite doable.

King_Tiger
Contributing Member
Contributing Member
Posts: 9
Joined: Fri Feb 13, 2004 8:19 am

Post by King_Tiger » Mon Feb 16, 2004 7:40 am

Bollinger,

I mostly trade stocks. It's great having a big bull market that rose 300% in 1 year+, but I believe sooner or later, it will end. So I'd better prepare myself for it. So I've just started to practise trading FX.

Please correct any misunderstanding or wrong thinking I have.

I notice that if I trade on breakouts, almost every time, I buy at the highest price (lowest for short) and the trend immediately reverses resulting in losses.

I suspect that's because I'm trading hourly. If I'm trading hourly, should I just change all turtle rules from daily to hourly?

Ta!

PS Your trading portfolio is quite interesting and unique to me. I have never seen any service provider offering such pairs, so I must assume you're working for a fund or a bank or something like that.

jankiraly
Roundtable Fellow
Roundtable Fellow
Posts: 52
Joined: Tue Feb 03, 2004 7:23 pm
Location: San Diego

Post by jankiraly » Mon Feb 16, 2004 8:24 am

I like the suggestion that appears at the top of my screen right now as I'm typing this. It says, "Trader's Roundtable, A forum for mechanical system traders."

An exciting feature of mechanical systems is that they are precisely defined and objectively testable. They exist in a framework that provides an easy answer to the question "What should I do? X or Y?" The easy answer for mechanical system traders is "Make X into a mechanical system, make Y into a mechanical system, test them both, and then choose the one with the better results."

It's worth repeating: the answer to the question "what should I do?" is "perform mechanical system tests and do what the test results tell you to do."

Chris67
Roundtable Knight
Roundtable Knight
Posts: 1046
Joined: Tue Dec 16, 2003 2:12 pm
Location: London

Post by Chris67 » Wed Feb 18, 2004 1:30 pm

Bollinger

I personally think trading on high yielding interest rates is a dangerous strategy .. however applying it to G10 ''Probably'' cuts down your risk .. trading in turkish / hungary etc is prob gonna make u money 95 % of the time but those cureencies always blow up eventually and that 5 % more than takes the profits away .. I think the major fx pairs always move in favour of higher rates over time .. witness stg .. but then look at the yen .. prob the strongest currency in world for sometime with zero interest rates .. its a dangerous game and smells of fundamentals to me .. but good luck

Chris

Bollinger
Senior Member
Senior Member
Posts: 40
Joined: Wed Apr 16, 2003 2:42 pm
Location: New York City

Post by Bollinger » Thu Feb 19, 2004 12:41 am

This strategy has worked quite well from inception -- over the last 4 1/2 months my FX account is up about 40%.

Regarding systems versus fundamental, you will soon learn that all traders are system traders at the end of the day if they are profitable. If a trader is able to consistently make money he has rules he adheres to.

For me, I have spent several years backtesting pure technical trendfollowing strategies on Trading Recipes, conferring with others doing so also, and profitably trading commodities in my account. I have a very robust strategy that I apply to all markets -- literally all, including pork bellies, gold, soymeal, rubber, and whatever else you used to think didn't trend well.

I apply that same strategy to the FX markets, with the additional fundamental analysis of interest rate differentials and the added edge of convergence trading. At the end of the day it has worked extremely well for me.

I understand your point regarding emerging market currencies being more volatile. Not anywhere near as volatile as many physical commodities, of course. I've learned many valuable lessons from mechanical long-term system testing and trading, and one of them is that you equalize each market's weighting by volatility. Thus, the Turkish Lira position is much smaller than the NZD/JPY position and if it blows up I'll take a loss but that's the way it goes. For the record, short-term lending rates in Turkey are 24%, so if I stay in a Turkish Lira position for 3 months and the Lira doesn't depreciate against the dollar by more than 6% I'll make money on the trade. Of course the Lira has actually been trending stronger so to me it looks like an attractive trade.

All my positions are in the midst of very long-term trends -- from a spot market point of view so that of course the carry is all gravy -- so it's not like I'm just taking a stab in the dark on a convergence trade. If the trade is a loser it'll be softened by the convergence, if it stays in one place the convergence will make it profitable and if the trend continues the convergence adds extra profit on top. Voila.

As for the hourly bars question, I have no idea how to trade profitably on a short term basis. All my trading is based on very long-term trendfollowing.

TradingCoach
Roundtable Knight
Roundtable Knight
Posts: 176
Joined: Thu Apr 17, 2003 9:52 am
Location: Sacramento, CA
Contact:

where can you trade exotics and do they allow mini accouts?

Post by TradingCoach » Sat Jun 12, 2004 2:24 am

I currently looking only for a traditional fx outfit like refcofx and fxcm

josbarr
Contributing Member
Contributing Member
Posts: 9
Joined: Tue Oct 14, 2003 12:08 pm
Location: Chicago
Contact:

FX

Post by josbarr » Tue Oct 05, 2004 10:07 am

Does anyone follow LBR's "Turtle Soup"?

TradingCoach
Roundtable Knight
Roundtable Knight
Posts: 176
Joined: Thu Apr 17, 2003 9:52 am
Location: Sacramento, CA
Contact:

problem with this FX strategy

Post by TradingCoach » Wed Oct 06, 2004 10:38 am

the bid/ask spread is often so large of the exotics that you can drive a Mack truck through.

NOISE
Contributor
Contributor
Posts: 4
Joined: Tue Aug 03, 2004 3:24 am

Re: FX Strategy

Post by NOISE » Thu Oct 07, 2004 9:31 pm

Practical strategy.

Your post reads pretty similar to Moodaeng's from a few weeks ago.

Thanks for sharing greater deatail.




Bollinger wrote:I'd like to discuss a strategy I've combined with my commodities long-term trendfollowing this last 4 months. It has been quite a profitable strategy over that time, and the combination with commodities trendfollowing has yielded 4 profitable months over that time.

I'll give a quick overview of my beliefs and FX trading strategy. The FX strategy is similar in some ways to the GCP program of FX Concepts, although their's lost 2% in January while mine made roughly 4%. See www.fxconceptsonline.com for more information on their strategies.

Principles system is based on:
-- Over the long term, high interest rate currencies appreciate against low interest rate currencies.
-- An appropriately designed trendfollowing system using a very long lookback period and buying or selling breakouts and exiting trades upon return to the moving average will be profitable over time if it is applied to a diversified portfolio of many markets and takes roughly equal-sized bets in each market.
-- A very long term system with infrequent trading minimizes the costs of slippage and commissions and therefore increases the profitability of the system.

That being said, I scan through many different currency crosses to determine which ones are moving in which directions. I do this using my Bloomberg terminal, which lets me look at literally any currency that I want. It also lets me choose from exotic crosses, examine short-term interest rates in each country, and compare volatility of different crosses.

I then settle on 5-8 currency crosses to open trades in. These crosses will have large interest rate differences in favor of the currency I buy. That means I'll be earning a nice carry throughout the course of the trade. The cross will also be trending in the direction of the currency I buy on a very long-term basis.

I then use Currenex to open the positions. Currenex lets me go to banks with a contract and let them compete against each other for prices. This is a wonderful tool for the trader -- I frequently see 1 pip spreads for EUR/USD spot. But I am doing forward contracts on relatively exotic crosses, so I request the banks for quotes and those and select the best that comes back. I generally do 3 month forwards for these.

How big a position do I open? I look at the volatility of each cross and equally weight each one based on the relative volatility. That means for a more volatile cross I have a smaller position on and for a less volatile cross I have a bigger position on.

My current positions are as follows:

Long Slovakian against Swiss (SKK/CHF)
Long Brazilian against Mexican (BRL/MXN)
Long Aussie against Singapore (AUD/SGD)
Long Kiwi against Japanese (NZD/JPY)
Long Hungarian against Norwegian (HUF/NOK)
Long Turkish against US (TRL/USD)
Long British against Taiwanese (GBP/TWD)


I hope everyone finds this interesting and helpful. I love this strategy and it's been quite profitable for me since I started trading it 3 months ago. I also combine it with a similar strategy trading commodity futures, and my research has shown that the combination should improve risk-adjusted return. FX Concepts has achieved sharpe ratios of 2+ with its strategies and I think this is quite doable.

Post Reply