FXI - Strategy

FXI is a systematic, quantitative currency trading program, which trades the currencies of developed countries (G10 currencies) in the cash ("spot") markets. It uses statistical methods - quantitative analysis of time series of currency prices. It does not use technical or fundamental analysis, pattern recognition techniques or discretionary trading decisions.

Diversification. One of the most important aspects of the FXI is diversification, the ability to trade simultaneously many currency pairs. The strategy creates a complex portfolio of 10 global currencies and adjusts its components daily. The mathematics of portfolio diversification show that diversification of currencies can lead to better reward/risk ratio than with individual currency pair.

Currencies traded. Tests show the FXI can work with arbitrarily selected currencies. The current trading program trades USD, EUR, GBP, CHF, CAD, NZD, AUD, SEK, NOK and SGD, given their excellent liquidity and tight bid/ask spreads. The strategy is non-parametric, i.e. there are no parameters to optimize, except the leverage multiplier and position size limits. The strategy was also tested on a completely different market (a portfolio of 100 US stocks) with good results. This proves that the system is very robust and it does not depend on any particular price pattern (which most trading systems depend on).

Strategy. The strategy opens long/short positions in various currency pairs. As stated before, due to portfolio diversification, the risk is more limited than if just one currency alone is traded. The strategy forms indexes of the 10 base currencies, which depend on the prices of the remaining 9 currencies against the index currency. It trades the components of each index (counter trend, short gamma) against the index itself (trend following, long gamma). Exactly the same rules are used for counter trend and trend trading. The point is to make use of the higher volatility in individual components against the lower volatility of indexes (as proven by the Modern Portfolio Theory). Based on positions of components and indexes (a total of 90 currency crosses), positions are then consolidated into the base 10 currencies, i.e. 9 currency pairs against the US Dollar. The resulting positions are then implemented in the market. The trading strategy is always in the market, but portfolio weights are adjusted daily.

Profit generation process. Each currency pair, depending on its portfolio weight and its daily price return, has a contribution to strategy daily rate of return (ROR). Since there are many long/short positions in various currency pairs of variable exposure, some positions will produce positive and some negative rates of return. The strategy, through active portfolio composition and adjustment, attempts to generate positive returns over time. The strategy is in the market 100% of time and daily rates of return are calculated on a mark-to-market basis.

Leverage. Strategy standard risk parameters employ an average combined leverage around 0.75 for the entire portfolio (the USD value of long portfolio components against the short portfolio components, relative to account size). The maximum leverage should not exceed 2.5. There is a position size limit for each currency against the USD of 0.8, relative to account NAV (Net Asset Value, or trading size).

Margin to equity ratio. The amount of an account’s net assets committed to margin will vary as a result of market conditions and portfolio composition. On average, 1.6% of net assets of an account will be committed to margin (if margin requirement for a 100,000 currency lot is $1,000). Based on strategy back testing, the maximum margin-to-equity ratio should not exceed 5%. If client’s FCM/FDM (Futures Commission Merchant / Forex Dealer Member) increases margin requirements (because of market volatility, illiquidity or otherwise), the percentage of net assets committed to margin may increase to levels beyond the stated values.

Risk control is achieved through a variety of means which in most market conditions should minimize drawdowns. The first is portfolio construction and diversification (trend and counter trend trading in indexes and their components); second is portfolio concentration control through position size adjustment according to account size, volatility and risk-reward analysis; and third is catastrophic stop based on money management rules.

Risk Disclaimer

THE RISK OF LOSS IN TRADING FOREIGN EXCHANGE (FOREX) CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION AND INVESTMENT OBJECTIVES. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER. TRADING IN FOREIGN EXCHANGE IS SPECULATIVE AND MAY INVOLVE THE LOSS OF PRINCIPAL; THEREFORE, FUNDS PLACED UNDER MANAGEMENT SHOULD BE RISK CAPITAL FUNDS THAT IF LOST WILL NOT SIGNIFICANTLY AFFECT ONE'S PERSONAL WELL BEING. THIS IS NOT A SOLICITATION TO INVEST AND YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTION.