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 trade not only different asset classes but also different strategies within the different asset classes. Aside from straight directional trading you likely do some relative value trading where you put pairs together and trade on their convergence or divergences. You might try some merger arbitrage, pairs trading, etc. Basically you are looking for great risk to reward opportunities and you don't care where you find them.
One of the best places for macro traders to really differentiate themselves from other categories is in the currency carry trade. While most people understand what a directional bet is, one in which you buy or short something and if it goes up or down you make money, many do not understand carry.
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.
To really juice the returns available from the carry trade you can and probably should use some degree of leverage. Some traders are modest and only use two to four times leverage while others are aggressive and use up to fifty times leverage. While high leverage is great when you are right they can be disaster when you are wrong as the losses are magnified on the way down just like they are on the way up. Of course is it that easy?
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.
You can use several different methods to estimate volatility. You can use the standard volatility index for the SP500. While it is designed and used primarily for equities it is a good estimate of volatility for most asset classes. Now days you can just use a currency volatility index like those from JP Morgan or many of the other investment banks.
If you are trading the carry trade then you should be using a volatility filter to greatly improve your results. If you are not trading the carry trade then you are also missing out on some great uncorrelated and relatively easy returns. And finally if you are not macro trading then you are missing out. You should be taking advantage of all the opportunities in the world and not just in stocks. - 23217
You trade not only different asset classes but also different strategies within the different asset classes. Aside from straight directional trading you likely do some relative value trading where you put pairs together and trade on their convergence or divergences. You might try some merger arbitrage, pairs trading, etc. Basically you are looking for great risk to reward opportunities and you don't care where you find them.
One of the best places for macro traders to really differentiate themselves from other categories is in the currency carry trade. While most people understand what a directional bet is, one in which you buy or short something and if it goes up or down you make money, many do not understand carry.
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.
To really juice the returns available from the carry trade you can and probably should use some degree of leverage. Some traders are modest and only use two to four times leverage while others are aggressive and use up to fifty times leverage. While high leverage is great when you are right they can be disaster when you are wrong as the losses are magnified on the way down just like they are on the way up. Of course is it that easy?
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.
You can use several different methods to estimate volatility. You can use the standard volatility index for the SP500. While it is designed and used primarily for equities it is a good estimate of volatility for most asset classes. Now days you can just use a currency volatility index like those from JP Morgan or many of the other investment banks.
If you are trading the carry trade then you should be using a volatility filter to greatly improve your results. If you are not trading the carry trade then you are also missing out on some great uncorrelated and relatively easy returns. And finally if you are not macro trading then you are missing out. You should be taking advantage of all the opportunities in the world and not just in stocks. - 23217
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 @ 2:58 AM
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