Macro Trading the Carry Trade
If you are into global macro you trade everything. You trade stocks, bonds, commodities, and even currencies. Essentially you are looking to trade anything that presents a great risk to reward opportunity that is not correlated with your other trades.
You don't just trade different asset classes but even different strategies within an asset class. If you trade bonds you will have some directional trades on, some spread trades, and some arbitrage trades. All of his is to further diversify your returns stream. You can do the same types of things in every asset class which makes your streams of returns very uncorrelated.
Macro traders have one strategy that most traders never use and that is the currency markets. Long the playground of only banks, currency trading is now available to the masses and is getting better and better. One of the best strategies in currency trading is that of the carry trade.
The carry trade consists of going long a high yielding currency and going short a low yielding currency to fund the trade. You make money in two ways. One is if the initial trade is profitable if the higher yielding currency goes up relative to the low yielder. The other way to earn money is to make money off the carry, or the interest rate differential.
The carry trade is helped tremendously by the use of leverage. If you can earn four percent via the differential and then magnify that by four or five you will then bring your returns up to sixteen or twenty percent a year from the carry alone. If you juice it up ten times you will have a forty percent return. This sounds great on paper but it cant be that easy can it?
No, it is not. Yes, you can get the carry but if there is excess or even normal volatility depending upon the leverage being used you will blow up in traders terms. If this is the case, and it is, then what should a trade be focusing on when they are trying to execute the carry trade? Well the obvious answer is volatility.
There are several ways to measure volatility. Some traders just look at several pairs and use an internal barometer of what is happening but most successful traders use at least some type of quantitative measure. We have the VIX which is used to look at equity volatility but happens to be a decent barometer of all volatility. There are also several newer currency volatility gauges like the JP Morgan currency volatility tools and the other investment banks volatility tools.
If you are an active macro trader that is using the carry trade then you should incorporate a volatility filter. If you are not using the carry trade then you are missing out on a great way to diversify as well as deliver more consistent returns. - 23221
You don't just trade different asset classes but even different strategies within an asset class. If you trade bonds you will have some directional trades on, some spread trades, and some arbitrage trades. All of his is to further diversify your returns stream. You can do the same types of things in every asset class which makes your streams of returns very uncorrelated.
Macro traders have one strategy that most traders never use and that is the currency markets. Long the playground of only banks, currency trading is now available to the masses and is getting better and better. One of the best strategies in currency trading is that of the carry trade.
The carry trade consists of going long a high yielding currency and going short a low yielding currency to fund the trade. You make money in two ways. One is if the initial trade is profitable if the higher yielding currency goes up relative to the low yielder. The other way to earn money is to make money off the carry, or the interest rate differential.
The carry trade is helped tremendously by the use of leverage. If you can earn four percent via the differential and then magnify that by four or five you will then bring your returns up to sixteen or twenty percent a year from the carry alone. If you juice it up ten times you will have a forty percent return. This sounds great on paper but it cant be that easy can it?
No, it is not. Yes, you can get the carry but if there is excess or even normal volatility depending upon the leverage being used you will blow up in traders terms. If this is the case, and it is, then what should a trade be focusing on when they are trying to execute the carry trade? Well the obvious answer is volatility.
There are several ways to measure volatility. Some traders just look at several pairs and use an internal barometer of what is happening but most successful traders use at least some type of quantitative measure. We have the VIX which is used to look at equity volatility but happens to be a decent barometer of all volatility. There are also several newer currency volatility gauges like the JP Morgan currency volatility tools and the other investment banks volatility tools.
If you are an active macro trader that is using the carry trade then you should incorporate a volatility filter. If you are not using the carry trade then you are missing out on a great way to diversify as well as deliver more consistent returns. - 23221
About the Author:
If you need actionable trading ideas then check out The Macro Trader It is a weekly global macro trading advisory publication with frequent intra-week updates for time-critical analysis and actionable trading ideas.
posted by X - Men @ 3:43 AM
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