Forex portfolio diversification

The vast majority of forex traders follow portfolio diversification strategies, in order to obtain profitable investments, maximising the return, while minimizing the risk. There are many well-known diversification strategies a trader can use. For instance, the selection of currencies based on the uncorrelated pairs is one of the most famous. The advantage of a diversification strategy is basically to reduce the trading risk. However, some side effects do exist too, as the more diversified the portfolio, the less variation will have.

A trader must bear in mind that over-diversification is never a very good idea. Dividing the trading risk in too many asset classes makes the portfolio insensible not only to future losses but also to potential profits. A diversification strategy is always possible, because modern forex brokers offer their clients to trade on various asset classes from the same trading account: commodities (gold, silver, oil), stock indices, cryptos, and so on. Correlations among these asset classes is the most important variable to take into account to achieve a good diversified portfolio.
The starting point to any money management strategy is understanding the elements of a trader’s account and tools the trader has at disposal. Next, the asset classes to chose. Last, the diversification strategy, that should take into account the limitation of losses (risk) and the maximization of profits (return).

In a money management, diversification strategy, the aim is to make a profit given a forecasted loss. Not to make profits at any cost. Traders aim to diversify their exposure, in such a way that no market move sets the account to zero.

When a trader wants to diversify his forex portfolio, he has to start with the size of the account. The amount per se doesn’t matter when applying diversification strategies, a minimum amount exists. The diversification principle holds for any amount, when trading a one hundred, one thousand or a million-dollar account. Investors use percentages calculated on the account’s size to decide the volume of a trade. This, in turn, affects the diversification method’s exposure and the trading account’s performance.

Are asset managers really wrong about the Euro?

Asset managers have been betting for many months, if not years, on an increase of the Euro against the Dollar. Unfortunately for them, the exact opposite is happening. Looking at the COT reports of recent months, fund managers, traditionally the most “strategic” or long-term investors, have brought their long positions over 300 thousand units, touching, last August , the historical record of 337 thousand units, to then slightly decrease up to the 300.5 thousand units of the last COT report dated 3 September. Just to make a comparison, the long positions amounted to not even 40 thousand units at the beginning of 2014.
Also their net positions, ie those obtained by subtracting the short positions from the long ones, have increased with a relatively linear trend in recent years, hitting an all time high of 179.5 thousand units on 24 April 2018, a threshold brought closer last August. In 2014, the difference was even negative, ie in favor of a prevalence of short positions.
The continuous increase in net positions is a clear indication of how asset managers continue to believe in a Euro exploit. A result which has never arrived. Indeed, by observing the Euro-Dollar exchange ratio, it is easy to see how this has been channeled into a downward trend since the beginning of 2018, when it was trading around 1.24. Currently, the pair is trading around 1.1, nearing a 28-month low of 1.0925. Why do asset managers continue to stubbornly focus on the Euro in the long run despite the results seem to prove them wrong? Certainly not for technical analysis reasons, since this type of investors use only the fundamental analysis. One of the reasons brought by some analysts is that the monetary policy stance of the European Central Bank is unsustainable in the long run and that therefore, the interest rates of the Eurozone will have to be increased sooner or later. The result is that the Euro will have to strengthen against the Dollar. Another hypothesis is that the US economy must pay the price of globalization sooner or later and thus diminish its role at the global level, with the consequence that the demand for D
ollars must be reduced accordingly.

Cryptosquawk – The latest news from the blockchain world

Bitcoin-Yuan divergence reaches new highs

Bitcoin-yuan divergence reached new heights, once again fueling speculations that China is possibly seeking to find safety in the world’s largest cryptocurrency. The Bitcoin and the yuan have been going to different trends for a while now, and their inverse correlation has reached a record last week, as a Bloomberg analysis of their 30-day correlation shows. This strong inverse correlation may be due to several reasons, including the trade war, the central bank’s monetary policy and the slowing economy. Bitcoin can be used as a way to hedge against traditional market volatility. “The role of these assets has essentially been reversed. Traders have been expecting a fall in the yuan for a while, in light of international tensions and the central bank monetary easing policy. With the trade war raging on, nervous forex traders have started to look at ways to diversify their portfolio and hedge against any market volatility. And, ironically, this has led them to turn to bitcoin, which has long been considered a notoriously “risky” asset, to hedge against a traditionally safer investment,” said a crypto expert interviewed by

PBoC is ready for its digital yuan

PBOC’s new digital currency chief, Changchun Mu, said the Chinese central bank’s upcoming digital yuan has features that Facebook’s Libra does not have. Mu has published details on PBoC’s digital yuan, describing it as a digital currency and electronic payment tool with ‘value characteristics.”Its functional attributes are exactly the same as paper money, but it is just a digital form,’ Mu said. PBoC’s digital yuan will be able to be transferred between users without an account and without a mobile or internet network. Providing a user’s mobile phone has a wallet, the digital currency can be transferred to another user by placing the two phones in physical contact. Presumably, this feature is enabled by near-field communication (NFC). ‘Libra can’t do this,’ Mu added. PBoC’s digital currency also doesn’t need a bank account, and it is free from the control of the traditional bank account system. It also allows users to preserve their privacy when using the system. However, the digital currency will be delivered via commercial banks like fiat currencies. The banks must open accounts with the central bank and buy the token at 100% value. Users may open digital wallets through the banks or commercial institutions. Mu added that the main reason which is incentivising China to develop its digital currency is “planning ahead” to protect monetary sovereignty and Bejing’s legal currency. The advent of Libra may be behind the sudden Chinese rush to develop its digital yuan. Former central bank governor Zhou Xiaochuan said in July that “Libra has introduced a concept that will impact the traditional cross-border business and payment system”, and this is why China should “make good preparations and make the Chinese yuan a stronger currency”.

The biggest misconceptions in the Cryptoverse according to Buterin has reported the five biggest misconceptions in the cryptoverse by Vitalik Buterin, co-funder of the digital currency Ethereum. There are the following:

1. Bitcoin misconceptions:
“On the Bitcoin side for example, like this idea that 2% inflation is this thing that’s wrecking the economy and the next… And the next big step for progress would be turning humanity into a type one civilization that roams the stars is to get rid of existing fiat currencies and replace them with this 21 million fixed supply kind of thing. I think that’s crazy.”

2. Tron and EOS misconceptions:
“I think they have this belief that basically says like, ‘Oh these blockchains are not super decentralized anyway and so we’re just going to be even more centralized and so we’re going to get more efficiency without getting any of the downsides… I think they don’t really realize the kind of, some of the more subtle benefits that de-centralization gets you and a lot of those things are going to come out like if political environments become less favorable.”

3. General cryptocurrency misconception:
“I see a lot of people kind of making a mistake one way or the other where they think that either cryptocurrencies are going to completely overtake Venmo [a mobile payment service owned by PayPal] or they think that there is no room for them at all.”

4. Censorship resistance misconception:
“Basically, a lot of people have this mindset that says, ‘We’re going to create this thing, and it’s going to just on its own completely be able to overpower governments and they’re not going to be able to do anything about it and it’s just going to turn the world into a crypto-anarchy and that’ll be great.’”

5. Government-related misconception:
“I think they underestimate the power that governments do have. So you look at things like, the great fire wall, like different countries attempts at enforcing copyright infringements on the Internet. Crackdowns on the sex industry — a lot of these different kinds of censorship.”

Mobius says cryptocurrency is not a safe haven

Mark Mobius, founder of Mobius Capital Partners, is still quite doubtful on cryptocurrencies and blockchain technology. Speaking on CNBC about emerging markets and safe-haven asset classes, Mobius said cryptocurrencies, like fiat money, are backed by faith and only hold utility as far as others are willing to use them.“The bottom line is there is a whole generation of people who have faith in the internet, they have faith in these cryptocurrencies…the degree to which a cryptocurrency can enable you to buy something and you believe that to be the case, then that’s fine.”Mobius also said a gold-backed cryptocurrency run on the blockchain would be of interest, however. “If there is a cryptocurrency that is really backed by gold and there is a meaningful agreement and some kind of modern thing connection, then this could be quite interesting,” he said. On blockchain, the investor remains skeptical. Mobius said the underlying technology itself remains open to attacks. “I believe blockchain is a very high-risk situation . . . anything that’s created by man can be broken into . . . and it could create a big crises, so I think we have to be very careful with blockchain.” The statements follow the stablecoin issuer Paxos’ announcement of a gold-backed cryptocurrency. Tokenized on the ethereum blockchain, Pax Gold entitles holders to a gold bar stored London by Brinks.

Commodity currencies

Commodity currencies are those currencies that co-move with the prices of primary commodities (oil, natural gas, steel, soybeans, etc.), because of these countries’ strong dependency on the export of certain raw materials for their revenues. Notwithstanding these types of currencies are most prevalent in developing countries (eg. Burundi, Tanzania, Papua New Guinea), developed countries like Canada and Australia have also commodity currencies, the Canadian and Australian dollar, respectively.In forex markets, the most famous commodity currencies are: the Australian dollar, the Canadian dollar, the New Zealand dollar, the Norwegian krone, the South African rand, the Brazilian real, the Russian ruble and the Chilean peso.For example, the higher the price of oil and steel, the higher the value of the Russian ruble relative to foreign currencies, because oil and steel are two of Russia’s most exported commodities. The Australian dollar is highly correlated with iron ore prices, as the country is the world’s top iron ore producer and exporter. The Canadian dollar is highly correlated with oil prices, as the country is the fifth-largest oil producer in the world, with the commodity accounting for almost 11 percent of the nation’s exports. Colombian peso is highly correlated with oil, as oil exports are responsible for about 20 percent of government revenue and 25 percent of total exports. Finally, the Peruvian Sol is highly correlated with copper, as Copper is Peru’s most important mineral export by value, amounting to 24 percent of exports in 2016 worth $8.77 billion.Therefore, a trader who wishes to specialize in commodity currencies should bear in mind that he has always to keep an eye on the commodities world, especially on those commodities on which the currency he is trading depends on.

Fibonacci: a communication code for Forex traders

The Fibonacci series are one of the most used and profitable tools in the Forex markets. Technically, the series is identified by a sequence of numbers where each of them is the sum of the previous ones. A number divided by the previous one tends to approach the constant value of the golden number which is 1.618.
This is a succession of positive integer numbers, where each number is the sum of the previous two. For example, the first numbers of the Fibonacci sequence are: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on.
The opportunities arising from the use of a strategy based on these successions depend on the fact that market trends assume oscillatory, rather than linear, trends.
An objective prerequisite for being able to identify and exploit a Fibonacci series is therefore the existence of a defined market trend. The price of a given currency must follow a direction defined with a movement called ‘swing’, and then reverse up to a certain level called ‘retracement’ (or backward tracing of the trendline), after which it is reversed again to resume the main trend, until when it does not exceed the previous maximum reached by the swing by a certain percentage  up to a point that it is called ‘extension’.On a graphical level Fibonacci retracements are identified by horizontal lines drawn at precise levels which depend on a market trend. They work a bit like they were additional supports and resistances, useful to establish the trend of prices and the turning points of the trends (both upward and downward). The levels to which they are usually placed are:
  • end and start: 0% and 100%;
  • 23.6%, 38.2%, 50%, 62.8%, 76.4%.
  • extensions: 161.8%, 261.8%, 423.6%.
In an uptrend the lines are drawn from the lowest point to the highest, while in the bearish one the opposite is true. By marking on the graph the extremes of the observed trend, it is possible to calculate the percentages of the traces, which become the reference point to understand the trend direction. If the trend changes direction then it will return to the different retracements.
Retracements are a tool that a trader must use to his advantage: graphically it requires to trace 5 horizontal lines on the diagrams that correspond to 5 possible areas in which the prices can return, with distances that are expressed according to the percentage of the original movement.
They also assume an even more important value if the levels of retracements coincide with supports or resistances, or trendlines that reflect current trends. These levels are even more fundamental to predict future price trends, or whether prices will remain within these levels or break one of the Fibonacci levels by overtaking it (up or down).

Sterling: from reserve to quasi-emerging currency?

Before Brexit referendum, the sterling was considered doubtlessly, like the US dollar, a world safe asset and a reserve currency, meaning that it was largely held by central banks and other financial institutions to prepare for investments, transactions and international debt obligations, or for intervention on forex markets. A strong and trustwhorty currency, to be bought in adverse market phases. Everything changed after the 2016 referendum, when the victory of ‘Leave’ sent the pound to a multi-year low against the dollar and increased its volatility. From that moment on, the British currency has lost its reputation of a safe asset, and, according to many analysts, its ups and downs remind the behavior of emerging currencies. The pound has lost -20.0 per cent of its value since the United Kingdom voted to leave the European Union. During the “flash crash” (October 2016), when it suddenly plunged to 1.15 against the dollar and over the last hours, the pound hit the lowest level since 1985 and a good percentage of forex traders believe that it can reach the parity against the euro, or it may go even lower, in case of no deal Brexit on October 31. The risk of ever-rising volatility surrounding the pound, which is a phenomenon which usually hits only emerging currencies, is so high that the British Financial Conduct Authority has been obliged to warn that trading it using information taken from unpublished polls could breach market abuse rules. The Sterling is experimenting very high levels of volatility, ahead of manoeuvres in the Parliament that could see a ‘no deal’ Brexit outlawed by MPs. Political uncertainty is infusing further volatility in the market and that one of the pound is becoming increasingly similar to that one of an emerging currency, so much so that the definition of a “quasi” emerging currency now seems the most appropriate one for the British currency.

The importance of the 200-day MA in Forex markets

The 200-day moving average (MA) is one of the most used tools by forex traders for detecting a long-term market trend. According to the technical analysis, when the price level coincides with the 200-day MA a major support level is usually identified when the is above the 200-day SMA, while it is seen as a resistance level when it is below the 200-day MA. The 200-day MA is a ready-to-use tool mainly (but not only) applied to daily charts. In this case, it covers the previous 40 weeks of trading, is commonly used in forex markets to detect the general market trend. As long as an exchange rate stays above the 200 MA on the daily time frame, the currency pair is considered to be in an overall uptrend. An alternative to the 200-day MA is a 255-day MA, which covers the entire previous year. From a strategic point of view, the 200-day MA, also known as ‘slow MA’ is often used in conjunction with other, shorter-term MAs (also known  as ‘fast MA’) to assess the strength of the trend as indicated by the distance between MA lines. The 200-day MA is considered such a critically important trend indicator that the event of the 50-day MA crossing to the downside of the 200-day MA is referred to as a “death cross,” signaling a serious bear forex market. Likewise, the 50-day MA crossing over to the upside of the 200-day MA is nicknamed a “golden cross,” referring to the fact that a currency is considered “golden,” or nearly sure to increase once that happens. It is possible there is also something of a self-fulfilling prophecy aspect to the 200-day MA; markets react strongly in relation to it partially just because so many traders attach so much importance to this rule of thumb.

Cryptosquawk – The latest news from the blockchain world

Bitcoin towards its third monthly loss in 2019

Bitcoin is headed to its third monthly loss in 2019, after another price drop in August.
The most famous cryptocurrency in the world is currently (Aug. 31) trading at $8,472, representing a -8.82% drop on the opening price of $9,395 observed on Aug. 1, according to Bitcoin has already fallen by -7.59% and -6.27% in January and July, respectively.
Bitcoin’s five-month increase – the biggest since August 2017 – ended last month. January’s -7.59% drop was the sixth consecutive monthly drop – the longest losing streak on record.
In the past, Bitcoin has marked sharp upward movements by $1,000 or more in just a few minutes.  For instance, prices rose from $9,300 to $10,400 in 30 minutes during on July 18. Nevertheless, this month this has not happened.

Top 10 Cryptocurrencies Are Trading Below their 200-day MA

Bitcoin is currently an exception among the top 10 cryptocurrencies by market capitalization at CoinMarketCap, as the other coins have fallen below a key long-term moving average, according to an analysis made by Coindesk. The top 10 cryptocurrencies by market value, Ethereum, Ripple, Bitcoin cash, Litecoin, Binance, EOS, Bitcoin SV and stellar, have all closed the trading week below their 200-period moving average on the daily chart. ‘The event marks a period of greater selling momentum, confirming the majority of the bearish mood currently prevailing among investors. Most traders now have their funds locked up in bitcoin, as seen by its high dominance rating standing at 69.1%’, Coindesk writes. The majority of the top 10 altcoins had already been trending bearish below the 200-period MA in July and Bitcoin cash was the last to fall below the average on August 28. ‘The onus is now heavily on the bulls to recoup losses above the 200-period MA’s or risk reverting back to 2018’s market trend of significant long-term lower lows and lower highs’, Coindesk concludes.

Some cryptos gained this month

Notwithstanding the biggest tokens have lost ground over the last days, there are four cryptos among the top 100 by market capitalization which have risen in the last trading week, recording a double- and even a triple-digit increase: ThoreNext, Oasis City, Egretia, and HedgeTrade. Three of them are among the top 50 by the total market capitalization, while Egretia on the 58th spot.

A new crypto investment by EAM

Elwood Asset Management (EAM), owned by billionaire Alan Howard, is building a new crypto investment platform for institutional investors, according to Financial Times, quoting EAM’s CEO Bin Ren. As reported by the London-based financial newspaper, Ren sees this as a ‘very big growth opportunity’ and hopes that the platform could eventually manage over $1 billion of assets. Details of the new fund have not been disclosed yet. ‘It is already known that the system would design portfolios for each investor, based on their risk preferences, expected returns and the liquidity terms they want. It will also measure the potential correlation with other assets they own’, reports. According to Ren, the company has already identified up to 50 crypto hedge funds that ‘probably satisfy our due diligence’.

Dimension of the crypto hedge fund market

As of May 2019, the market of cryptocurrencies hedge fund was made by 150 active hedge funds, collectively managing $1 billion in assets, excluding crypto index funds and crypto venture capital funds.
Over 60% of these hedge funds managed less than $10 million in assets under management with fewer than 10% managing over $50 million. The average AuM as of the first quarter of 2019 was $21.9 million and the medium $4.3 million, three times bigger than the median AuM calculated at fund launch ($1.2 milion in January 2018). This indicates that funds have been relatively successful at fundraising, despite difficult conditions in the cryptobusiness. The median fund returned was -46.0% in 2018 compared to a Bitcoin benchmark of -72.0%.

The Pound rise could be short-lived

The Pound jumped more than one per cent against both the dollar and the euro, as forex traders bet on a possible agreement between the British government and the European Union. The rise came just as Prime Minister Boris Johnson was meeting with French President Emmanuel Macron in Paris.
Forex traders took well Macron’s words, which appeared to show unexpected opening upon the Irish backstop issue. Following the statement made by German Chancellor Angela Merkel yesterday, Macron said a solution to the backstop mechanism could be found within 30 days “if there is good will on both sides”.
The Sterling rose up to 1.2279 against the greenback (+1.1%) and up to 1.1077 against the single currency (+1.1%).
Nevertheless, the optimism by traders upon a possible agreement between the two parts could be excessive. In fact, president Macron poured cold water upon the idea of a new Brexit timetable, as wished by Johnson, stating the backstop mechanism remains “indispensable” and arguing that London must offer “visibility”.Some analysts still believe there is little chance of a workable alternative being found within this time frame. British Express wrote that ‘more cynical assessments suggest the offer may be an effort by Berlin and Paris to evade the blame for a no-deal Brexit’. In this case the baseline scenario is still for a parity between the sterling and the euro by 31 October, the official Brexit day.

Long Short Strategies in forex markets

In Forex markets a long/short strategy is used to maximise traders’ profits, from both the rise and fall of exchage rates. The reason why it was created is that such a strategy is more profitable than the simple ‘buy and hold’, or ‘just go long’ strategies, according to which asset managers do not take short positions and therefore cannot benefit from both rising and falling prices.
In long/short strategies, traders look to buy currencies they expect to rise, while selling short those they expect to fall. If the move is right, the strategy’s return is higher than that of other strategies, achieving also the target of portfolio diversification.
Long/short strategies may benefit a trader in two ways. First, the trader has a variety of investing solutions. Second, unlike traditional ‘buy and hold’ strategies, which have 100% exposure to the market, long/short strategies provide traders with the possibility to shift their balance of long and short positions to alter their sensitivity to market movements.
Investment giant Blackrock suggests that one way to fund an allocation to a long/short strategy is to consider reducing exposure to other funds that hold the same asset class, in order to obtain a more diverse, less volatile portfolio. This suggestion holds also in Forex markets.