FX Strategy
Posted: 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.
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.