Carry Trading by Malcolm Morley

Carry Trading by Malcolm Morley

Although I do not carry trade in my published accounts here, I maintain a carry trading basket in another set of accounts. To my mind, it’s a very valid trading method, and I have been rewarded with a return of about 600% over the last year, which isn’t too shabby, particularly since I only monitor it weekly! Want to know more? You are in luck – I’ve set out exactly how I do it in the thread below. You just need to read the whole thread.

Although I do not carry trade in my published accounts here, I maintain a carry trading basket in another set of accounts. To my mind, it’s a very valid trading method, and I have been rewarded with a return of about 600% over the last year, which isn’t too shabby, particularly since I only monitor it weekly! Want to know more? You are in luck – I’ve set out exactly how I do it in the thread below. You just need to read the whole thread.

Extract only:

I’ve described how I manage my carry basket in a past thread (I don’t know which one), but basically I’ve made the decision that I want to run my carry basket indefinitely.

In order to do that I allocate a fixed percentage risk – let’s say 15% of the account, calculated somehow. Each week, I review the pairs I’m holding for interest rate changes, and adjust my exposure to each pair, depending on my current NAV. If I’ve made money during the week, I buy a little bit more; if I’ve lost money during the week, I adjust my holdings down. I therefore always maintain a fixed risk, no matter how much money I have in my carry account.

With the above approach it doesn’t matter how many pairs are in your basket. You simply divide your fixed risk by the number of pairs you wish to carry. If the number changes, so does the trade size of the remainder.

Believe it or not, trading once a week works! Although, as I’ve commented before, carry trading like this is not necessarily for the faint hearted.

……..

All things being equal, people will invest in high yielding currencies, at the expense of low yielding currencies, for obvious reasons – yield. This demand causes the price to change, again all things being equal, in favour of higher yielding currencies.

In carry trading it’s this tendency for rate appreciation that normally attributes most of the gains. It’s also why I like to see at least a 3% differential, to encourage this significant phenomenon to take place,

Don’t forget this is a broad generalization that only suits a long-term strategy. Day-to-day anything can happen.

To see this working in action you only have to look at the relative strength of the AUD and NZD. Also, the USD was in freefall until they started raising rates. The freefall first stopped, and then reversed.

Finally, 99% of market moves following economic announcements are based upon perceptions on how the information may affect interest rates. If it’s bullish for rates, the price goes up; if it’s bearish for rates, the price goes down.

~chaffcombe

I have lived and breathed trading ever since trading fx professionally in London, Toronto and Philadelphia in the early 70's (yes I know that shows my age!). While my professional career subsequently took me from the trading desk to designing treasury systems for some of the world's leading financial institutions, my desire was to always trade for myself. As a consequence, following 5 years with a major international stock-broker (the last 3 as... More