One of the best ways to trade forex (foreign currencies) during market volatility, is by buying a basket of currencies. A currency basket includes multiple currency pairs that either complement each other or off-set each other. There are two types of currency baskets for two completely different strategies. Here we look at both types of currency trading strategies and both forex baskets.
Single Currency Basket
This type of basket is for the trader looking to buy into 1 currency, because he thinks that one currency is only going up (or down). However, the basket allows for you to absorb more volatility than buying a single currency pair. Let’s say you think the Japanese Yen is going to fall this week. It has good downward momentum, and news supports your theory. Now you have to decide which pair will perform the best: EUR/JPY, USD/JPY, etc. Instead of deciding on one currency pair, buying 10 lots of USD/JPY, you can buy a basket of several currency – all against the JPY.
For example, if you think the USD/JPY will fair the best, but can’t be sure: buy a basket of 4 USD/JPY, 2 EUR/JPY, 2 GBP/JPY, and 2 AUD/JPY. Now you’ve got a piece of the pie, regardless of which pair outperforms the others. It also helps soften the blow, if the Yen rises and your opposing currencies all fall. I placed this exact strategy last week, and (to my dismay) the Yen did rise, and all my pairs fell. However, at week’s end, the GBP/JPY had only fallen 4 pips, the EUR/JPY was down 17, while the others were down about 40 pips. I was able to absorb some of the volatility and take a smaller loss. This week, using the same strategy, all of my pairs are in profit, but GBP/JPY is outperforming. I’m getting bigger profits than if I had just bought 10 of the USD/JPY straight out.
In this forex basket, we buy a couple opposing currencies. Buying 5 EUR/USD lots and then selling 5 GBP/USD lots is essential betting for and against the Dollar at the same time. Why might this strategy work? Because I think the Euro will outperform the Pound. If the EUR/USD rises 150 pips while the GBP/USD only rises 100 pips, I will be ahead 50 pips. Add 1 lot of EUR/GBP long to this basket if you really feel strongly about the angle. If I am wrong, and the Dollar is strong, my losses will be less than in a non-basket trade. I might even profit. I might be wrong about the direction, but if the EUR/USD only falls 80 pips, and the GBP/USD falls 100 (as a weaker pair), then I am still ahead 20 pips. My 1 EUR/GBP will likely be a few pips ahead too.
There is a third basket, intended to gain interest, but I’m not a fan of it. In this forex basket you buy high-interest currencies and sell currencies with low interest rates. For example, buy 5 lots of AUD/JPY and 5 AUD/USD, while selling 5 EUR/JPY and 5 NZD/USD. You will gain a nice amount of interest every night, while the pairs themselves should offset each other in principle. Some people hold these types of baskets for 9 months to a year, earning interest along the way. The danger of this, is a sharp fall in carry trades. If the RBA cuts interest rates and the AUD collapses, you could lose far more than you’ve gained in interest this year.
Regardless of which basket you prefer, consider making a basket of currencies in your next forex trading session.
See Also: The Pros and Cons of Forex Binary Options
Trading Forex without a Stop Loss: Currency Options together with Spot FX
Understanding the FIFO rule in Forex Trading