Big Banks Forex Trading Strategy || Mid-Term

First of all I would like to recommend a great document out there - "DB Guide to Exchange-Rate Determination" which was written by Deutsche Bank in 2002 and is overfilled with FX rate determination, forecasting methods which can be used for all short term, mid-term and long term trading. If you haven't read it, look for it, download to your Kindle and take the time. It is worth reviewing. :)

 


In the documents several FX trading strategies are described with reference to many academical papers and literature. One of them - the Forward-Rate Bias strategy. Its results are stunning for longer term FX trading and its sharp ratio has beaten the S&P500 twice. As the DB says: "This is the bedrock of Deustche Banks's Forward-Rate Bias trading system".

 

  • Forward Premium and Discount

 

It is necessary to understand what Forward Premium and Discount is before diving deeper in to this.

 

Premium - Situation where the spot futures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate then it is currently. A forward premium is frequently measured as the difference between the current spot rate and the forward rate, but any expected future exchange rate suffices.



Discount - situation where the domestic current spot exchange rate is trading at a higher level then the current domestic futures spot rate for a maturity period.

 

 

where

        N - represents the maturity of a given forward exchange rate quote
        d - represents the number of days to delivery
        P - is the premium (if positive) or discount (if negative)
        F - is the forward exchange rate
        S - is the current spot exchange rate

 

  • Forward Bias Strategy - Trading the Bias

 

"Favorite approach to trading the forward-rate bias is to adopt a diversified strategy to exploit the fact that currencies trading at a forward discount tend to outperform those currencies trading at a forward premium".



The recommendation is "going long the three highest-yielding currencies in the industrial world and going short the three lowest-yielding currencies in the industrial world. Net long/short positions are put on at the beginning of each month and then closed at the end of each month. This process is repeated each month over time". 

 

  • Long Run Track Record for USD-Based Investors

 

This is truly old backtest and I would be really interested whether it can perform this good in todays market. So if there was a demand for it, I would dive into that ;o) Write a comment if you want to see it.

 

 


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Posted By pattishenky : 26 September, 2020
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