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Majors vs. Crosses vs. Exotics Portfolio Selection

Posted: Wed Jan 04, 2012 5:21 pm
by rossb34
I primarily trade spot forex with LTTF systems. I selected the six majors to include in my portfolio due to small spreads of 1 to 2 pips and good data to test on. This past year was the first full year trading my systems and with such a volatile 2011, I am happy with the system’s performance of just over a couple percent.

I have been reading through sluggo’s post history and have been inspired by his “kitchen sink portfolioâ€

Posted: Thu Jan 05, 2012 8:09 am
by gunter
You should speak to LeviF. I believe he trades most currency pairs available.

In my backtests I found that after a certain number of instruments, the incremental improvement in MAR starts to decline. In my case, I believe it was due to the fact that a lot of the currencies are relatively correlated to each other, i.e. CHF/JPY / EUR/JPY & USD/JPY.

However, you should do your own backtesting and decide which strategies suit you.

Posted: Thu Jan 05, 2012 8:59 am
by LeviF
Yes, I pretty much include everything in my portfolio I have access to. Although you name DKK which is pegged and I dont trade anything pegged (except I did leave CHF in there for now). I also trade all the exotics I have access to, but I do limit the crosses of exotics (ie I trade USDTRY & EURTRY, but not CHFTRY & TRYJPY, etc).

A lot of the crosses are highly correlated to other pairs but what can you do. I think its better to trade them all then try to cherry pick. And trading crosses does offer better risk adjusted returns than just the majors. Even though some are highly correlated you still get in & out and slightly different places, so that offers some diversification.

You do mention spread costs and I will say that if you trade long term the higher spreads of the crosses are of minimal consequence. If you are trading on a shorter term basis than it becomes much more important.

And congrats to you ending the year in the black, I havent received my figures back from the accountant, but it will be around -20%.

Posted: Thu Jan 05, 2012 4:26 pm
by svquant
Also check out some of the FX research publications from big banks like JPM, DB etc. They list which FX pairs they trade (or model) in their various FX exotic beta products (like the G10 carry harvest from DB). Most banks list the G10 and EM crosses they consider liquid & important. This might be a good place to start. Most people looking at the G10 do not trade all 45 pairs but usually keep it to 16-23 pairs and EM adds another 8-12.

Just a suggestion to leverage what other professionals have done and published.