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3/23
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Introduction:
I’ve written a lot about Carry, and its uses in trading FX recently. In this article, I will look at how most efficiently to structure a carry portfolio across the varying risk levels. A simple re-cap of what FX carry is, is that you buy high yielding currencies, while simultaneously selling low yield currencies, in order to receive the difference in interest. The idea behind this comes from interest rate parity pricing of forward FX contracts (I went into detail here), but basically, the future value of a currency should discount any interest rate difference. I.e. at its heart, when you buy a higher yielding currency, the main objective is not that the currency increases in value, just that it stays above the forward value of the currency so that you gain Carry. However these particulars are not too important, what is important is how we structure a portfolio to suit our needs most effectively.
As discussed previously, the generic go to carry portfolio for G10, is buying the top 3 yielding currencies, whilst simultaneously selling an equal amount of the 3 lowest yielding currencies.
As a reference point, here is a table of 2Y swap rates for the currencies within th…
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gino32 avatar
gino32 21 July

do you use technicals? japanese candlesticks? on major time frames to filter only pairs with healthly bullish trends and bearish trends? or do you hedge techniques using negative correlated assets? or both?

WayneZhou avatar
WayneZhou 21 July

Awesome,great work .....

AdrianWS avatar
AdrianWS 21 July

gino32 hi, thanks for the question. a) I would hope to avoid that situation via active management of the portfolio (3rd step) b) however it is inevitable that losses do occur from time-to-time. With carry, patience is the key. in that situation, I would most likely leave my portfolio alone. Carry is *not* zero-sum in the long run, you do make money, hence patience being key. c) I will incorporate all that you mention, and more fundamental analysis into the discretionary holdings so that I get as much alpha as possible using the skills that I have, but at the end of the day, carry is king.

Airmike avatar
Airmike 26 July

Very good article as always.

MyiDEA avatar
MyiDEA 31 July

good job

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13/23
Ranking
Introduction :
I've looked at the Carry trade in short bursts across previous articles, but I thought I should have a more detailed look at them this time around. Furthermore, I want to explore some other possibilities around the carry trade, such as the best way to bet against it and so on.
First of all though, we need to consider that carry is in fact a very powerful aspect, it really is. I will demonstrate this by first looking at the Argentine Peso. Now the ARS is no ordinary currency, sure. In fact it currently has a yield of around 32%! as shown by this chart.
We must remember that in late January this year, the ARS crashed 15% in one day. A huge move, something frankly unthinkable for a major currency such as the EUR or AUD. This huge volatility is why traders and investors demand such a high interest rate.
But even though the ARS had a devaluation event earlier this year, it is still positive YTD. That is, if you had bought the ARS on January the 1st, you would have made money.
This to me is an absolutely incredible reminder at how powerful carry is! As even after a currency crashes, the interest afforded to you still means you profit.
A longer time series shows the quite …
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mimuspolyglottos avatar

Is the first chart in ARS terms or in USD terms?

AdrianWS avatar
AdrianWS 8 July

The implied yield one? doesn't really matter as its a %. But it is calculated with USD being the base currency. Likewise with the total return graphs, they are USD base.

mimuspolyglottos avatar

I meant second one. Having problem with my new monitor in portrait mode. Thanks.

Airmike avatar
Airmike 14 July

very nice article. put options and carry is one of my favorite strategy,  but I am going to trade AUD , definitely :)

Tinktank avatar
Tinktank 20 July

Very nice article! I still remember when carry trades were very popular some 5years ago when the US interest rate was above 4%. It was a lot easier trading the USD/ JPY.

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1/30
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Intro:

There are many Short term trading strategies - many of which can be seen with various articles here, they range from simple Moving average crosses, to using overbought/oversold signals and many, many more technical indicators. Broadly speaking, a rules based strategy involves no skill and this applies to both shorter term and longer term strategies. However, market participants need to know when to use each - for example, using RSI is unlikely to work to effectively over the course of 20 years, but can work quite well on a 30-minute chart, likewise using any of the three main multi year strategies fail to work on shorter term timeframes.
Here is a quick look at some simple short term strategies and their backtests (tested on the AUDUSD), while there are some profitable ones, sharpe ratios and Max DD's are awful and thus these will fail in the long run.
Long term FX strategies:

As highlighted above, there are literally 1,000's of techniques that are used in trading, yet only 3 have stood the test of time, these are as follows; Carry, Value and Momentum. I will look at each one individually to explain what they are, and why they have been successful.
Carry:

Th…
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Daytrader21 avatar

You're correct on the Risk on/risk off environment, if you run a correlation between risk trends like S&P500 and overlaying AUD/USD it can bee seen that from last year's summer the correlation has broke, as SP500 runs to new all the highs and at the same time aussie breaking lower. But at some extend on short time periods this relationships are still present.

mimuspolyglottos avatar

Becoming Hall of Famer. Very glad to see article about trading style of mine. The risk of prolonged stability with low volatility is in a situation,  when people have to put in trade more and more to meet their profit targets. In carries (almost) all use the same approach and  same techniques making ''pump&dump" conditions. This article is useful for me because I have been trying to build carry baskets (risk-adjusted) since 2007 to fund low vols pairs trading (USD/SGD,CHF/EUR).

mimuspolyglottos avatar

Thank You very much.

Armands avatar
Armands 14 Apr.

I guess that in future all central banks will set their interest rates near to 0% and then there will be no carry trades :)Other two I never knew, so I learnt something new. Good job!

dntrader avatar
dntrader 11 June

I like long term forex strategies.

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11/43
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What ever happened to the carry trade? Back in the middle of 2007 I was just a year into my trading "apprenticeship". I just had just blown my first account and was trying to find the perfect system that will make me a millionaire overnight. I knew a friend who was just starting out in trading, lets call him Bob. "Bob" got into forex trading by hearing about the "Carry Trade".What is the "Carry Trade" ?A "Carry Trade" is executed when you borrow a currency that has a low interest rate, like the Japanese Yen and at the same time you buy a currency that has a high interest rate. You make a profit of the interest rate differential between the two currencies, also called Carry or Rollover.The prime example for a so called "funding currency" for the past decade has been the Japanese Yen. The Bank of Japan has kept interest rates in the near zero range for close to 15 years now. See the chart below for this.As can be seen on the chart, Japan's interest rates stayed in the 0%-0.5% range all throughout the past decade. Even to this day Japan has one of the lowest interest rates of the world ranging at 0%-0.10%.Back in 2007 there were a lot of currencies with "high" interest rates. The more…
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Ivolux avatar
Ivolux 20 Dec.

Interesting read, guess we all know what happened next, huge crash all the way to 120.00

scramble avatar
scramble 24 Dec.

funny your avatar followed by the title of the article in the contest home page :)

scramble avatar
scramble 24 Dec.

and nice article of course!

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