TO IMPROVE THE ALPHA generation of your FX overlay, try
implementing a technical strategy. Run {.IEMCARRY Index
BTST <GO>} to get an overview of some of the most popular
technical strategies over your specified time frame and periodic-
ity. Looking at monthly data in the 10 years through Jan. 1, you can
sort by the Profit Factor column to find a strategy whose winning
trades generate more profit than its losing trades lose (FIG. 3).
Here, the strategy with the largest profit factor is Williams %R.
Developed by trader and technical analyst Larry Williams,
Williams %R is an oscillator that’s useful for identifying potential
turning points. It shows how a security is trading in relation to its
highs and lows over a specified lookback frame. The default number
of periods the indicator uses for the lookback is 14—that is,Each currency is equal weighted at 20%. The low yielders are the
Taiwanese dollar, Hungarian forint, Israeli shekel, Czech koruna, and
South Korean won, which are similarly equal weighted.
Once you’ve created an index of your strategy, you can chart
it. A G chart, for example, lets you view the performance of the
index relative to its constituent currency return indexes since the
beginning of 2010 (FIG. 2). Assuming we rebalanced it on a monthly
basis, as represented by the monthly periodicity of this chart, this
strategy would have returned -25% through the beginning of
January. Not great. That can be largely attributed to the poor per-
formance of the Turkish lira, which returned -34% and was in the
long basket, and the strong performance of the Korean won, which
gained 10% and was in the short basket.
The strategy is built
with the Bloomberg
FX Forward Indices,
which you can track
by running {IN <GO>}
and clicking on the
Strategy tab.Here, the strategy
would have returned
-25% in the 10 years
through the beginning
of the year. Not great.Fig. 1 Here’s the formula you can use in {CIXN <GO>} to build a simple emerging-markets carry trade
strategy. To load a ready-made version of the strategy, run {.IEMCARRY Index CIXU <GO>}.Fig. 2 Once you’ve created a strategy, you can chart it against its constituent indexes.<GO> INSIDE THE TERMINAL 39