Sunday, 6 July 2014

What's beta in FX?

19:24 Posted by The Thalesians (@thalesians) 5 comments

For my very first post on the Thalesians blog, I feel that I should tackle the notion of what is beta in FX. If you haven't spent a long time in FX markets, it can seem somewhat confusing to understand what should be a benchmark or "beta" to use a bit of market jargon. In equities, we have the S&P500 which can be used as a beta for long only investors. Similarly, in bond markets, we have various global indices produced by a multitude of banks, including Citi, Barclays and JPMorgan. Even in these cases though a beta is still something which isn't quite concrete.

In FX, there is no such obvious "beta". Furthermore, the notion of a long only investor can be confusing in FX. It is difficult to identify a "long only" investor in FX. After all, if you undertake an FX trade, for example long EUR/USD, you are simultaneously long one currency and short another. Hence, in order to understand what market beta is in FX markets, we need to adopt a slightly different approach. First, we need to have an idea of the typical factors which FX funds use to trade. 

Perhaps, the most common strategies which are used to trade FX, are those which involve carry and trend, as well as value. Of course there are many other common FX strategies, such as using relative interest rate differentials, modelling flows and using macro based models. Our aim is not to create an exhaustive list, but simply to understand the most common. By definition a "beta" strategy is one which can capture the returns of the market and generally requires less "work" than an "alpha" strategy.

If we purely focus on carry and trend, possibly the most popular FX strategies, we can create very generic versions. Carry involves buying high yielding currencies and selling low yielding currencies. In effect, it is a way of capturing a risk premium within FX markets. Hence, it can suffer from asymmetric returns, steady profits, but then suffering large drawdowns when there is risk aversion. A generic version of carry, simply needs to create a rank of the deposit yields on currencies. Trend strategies, as the name obviously suggests, attempt to buy high (and sell even higher), and sell low (and buy even lower). We can create a generic trend model using relatively simply technical indicators such as moving averages.

Once we have created these generic carry and trend models, we can regress them against the returns of a FX fund index (such as HFRX Currency Index). This enables us to find weights for our generic carry and trend models, which should proxy FX fund returns. We can then create a weighted portfolio of carry and trend, which as we see below does actually proxy FX fund returns pretty well! Hence, at least on a broad based level, it does appear that carry and trend seems to capture a lot of what FX funds do (see plot at the top!).

To read more about this topic please see the below work I've done, which goes through the subject in more detail. My book Trading Thalesians also has a chapter on alpha and beta (mixed in with a bit of ancient history).

Thalesians - Beta'm Up - What is market beta in FX - 30 Aug 2013 (Download from SSRN)
Handbook of Exchange Rates (Wiley) - chapter on FX market beta by Saeed Amen & Geoff Kendrick

5 comments:

  1. Nice post. I found this post very useful and informative. Thanks for sharing.

    ReplyDelete
  2. Q: Which platform to use with this software?
    A: You can use any trading platform! Yes, you can use MetaTrader 4, MetaTrader 5, TradeStation, NinjaTrader... because the software runs on dedicated computers and you

    only need a web browser to get the instant result online.

    Q: How many currency pairs does Forex Trendy scan?
    A: It scans 34 Forex pairs on 9 time frames from 1-minute to monthly. Together 34 pairs x 9 time frames = 306 charts.

    Q: What method is used to determine the trend?
    A: The trend reliability is determined by the "Trend Drawdown" - a method that uses no indicators, but pure price action. This method is explained in the ebook you

    will get in the subscription.

    Q: Which configuration do I need?
    A: Use the latest version of any major web browser (Internet Explorer, Firefox, Chrome, Safari, Opera...)

    Q: Does it work on mobile devices?
    A: Yes, it has been tested on several mobile devices and browsers.

    Try it now:

    ==> http://www.forextrendy.com?laush394758


    "I really like your idea of taking only the best trending pair and even time frame. I am very impressed with such a simple and effective approach. I am not a tech guy

    and I am amazed how it works online without anything to install... I just log in two times a day and check for any interesting pairs."

    Stephen Ross, NY

    "I use this software every day together with my own system and two EAs. I execute trades only when trend drawdown is below 15% so I decreased the trade frequency, but

    I got two times better results. I am also interested in pattern recognition, I haven't tried it yet, but it looks amazing!"

    Julien Labonne, Florida, USA

    "I would highly recommend this service to anyone serious about forex trading. Another one that gives back much more than he receives. The real value for such a low

    price is rare in the forex industry."

    Sebastian, Germany


    ==> http://www.forextrendy.com?laush394758

    ReplyDelete
  3. Drawing trend lines is one of the few easy techniques that really WORK. Prices respect a trend line, or break through it resulting in a massive move. Drawing good trend lines is the MOST REWARDING skill.
    The problem is, as you may have already experienced, too many false breakouts. You see trend lines everywhere, however not all trend lines should be considered. You have to distinguish between STRONG and WEAK trend lines.
    One good guideline is that a strong trend line should have AT LEAST THREE touching points. Trend lines with more than four touching points are MONSTER trend lines and you should be always prepared for the massive breakout!
    This sophisticated software automatically draws only the strongest trend lines and recognizes the most reliable chart patterns formed by trend lines...
    ==> http://www.forextrendy.com?kdhfhs93874
    Chart patterns such as "Triangles, Flags and Wedges" are price formations that will provide you with consistent profits.
    Before the age of computing power, the professionals used to analyze every single chart to search for chart patterns. This kind of analysis was very time consuming, but it was worth it. Now it's time to use powerful dedicated computers that will do the job for you:
    ==> http://www.forextrendy.com?kdhfhs93874

    ReplyDelete
  4. "I really like your idea of taking only the best trending pair and even time frame. I am very impressed with such a simple and effective approach. I am not a tech guy and I am amazed how it works online without anything to install... I just log in two times a day and check for any interesting pairs."

    Stephen Ross, NY

    "I use this software every day together with my own system and two EAs. I execute trades only when trend drawdown is below 15% so I decreased the trade frequency, but I got two times better results. I am also interested in pattern recognition, I haven't tried it yet, but it looks amazing!"

    Julien Labonne, Florida, USA

    "I would highly recommend this service to anyone serious about forex trading. Another one that gives back much more than he receives. The real value for such a low price is rare in the forex industry."

    Sebastian, Germany


    ==> http://www.forextrendy.com?laush394758

    ReplyDelete
  5. Q: Which platform to use with this software?
    A: You can use any trading platform! Yes, you can use MetaTrader 4, MetaTrader 5, TradeStation, NinjaTrader... because the software runs on dedicated computers
    and you only need a web browser to get the instant result online.

    Q: How many currency pairs does Forex Trendy scan?
    A: It scans 34 Forex pairs on 9 time frames from 1-minute to monthly. Together 34 pairs x 9 time frames = 306 charts.

    Q: What method is used to determine the trend?
    A: The trend reliability is determined by the "Trend Drawdown" - a method that uses no indicators, but pure price action. This method is explained in the ebook you
    will get in the subscription.

    Q: Which configuration do I need?
    A: Use the latest version of any major web browser (Internet Explorer, Firefox, Chrome, Safari, Opera...)

    Q: Does it work on mobile devices?
    A: Yes, it has been tested on several mobile devices and browsers.

    Try it now:

    ==> http://www.forextrendy.com?laush394758


    "I really like your idea of taking only the best trending pair and even time frame. I am very impressed with such a simple and effective approach. I am not a tech
    guy and I am amazed how it works online without anything to install... I just log in two times a day and check for any interesting pairs."

    Stephen Ross, NY

    "I use this software every day together with my own system and two EAs. I execute trades only when trend drawdown is below 15% so I decreased the trade frequency,
    but I got two times better results. I am also interested in pattern recognition, I haven't tried it yet, but it looks amazing!"

    Julien Labonne, Florida, USA

    "I would highly recommend this service to anyone serious about forex trading. Another one that gives back much more than he receives. The real value for such a
    low price is rare in the forex industry."

    Sebastian, Germany


    ==> http://www.forextrendy.com?laush394758

    ReplyDelete