By IFCMarkets
Good afternoon, dear traders. Today we consider the currency portfolio building based on the PCI technology (Personal Composite Instruments). For more detailed step-by-step instructions for creating a synthetic instrument in the NetTradeX platform click here.
The portfolio trading advantage consists in diversification opportunities of unsystematic, individual risks of the basic tools that are included in the portfolio. Individual features of countries and economies that affect the trend of the respective currencies are of a less risk for the portfolio volatility. Today we offer a simplified scheme of portfolio making based on the currency pair correlation analysis. These correlation coefficients can be calculated independently or imported from external resources. We use the correlation calculator of Investing.com. The EUR/USD currency pair is used as the intermediary system instrument. If we consider the daily candlesticks and 10-day sampling, we will obtain the corresponding correlation table between EUR/USD and 4 the most closely related pairs:
| Intermediary currency | Portfolio currency | Correlation(%) |
| EUR/USD | GBP/USD | 80 |
| EUR/USD | CHF/USD | 100 |
| EUR/USD | CAD/USD | 87 |
| EUR/USD | JPY/USD | 87 |
The correlation is given with an accuracy of 1%. Direct and inverse quotes are used. Let us simplify the CAPM model classic approach and choose the portfolio weights proportional to correlations. Then we obtain the following portfolio formula: CAD(24%), CHF(28%), GBP(22%), JPY(24%). The USD quoted part is omitted. Let us create a portfolio using the GeWorko Method in the NetTradeX platform. The daily chart for the instrument [CAD(24%)+CHF(28%)+GBP(22%)+JPY(24%)]/USD is represented below. Let us remind you that for speeding up the calculations the platform calculates candle bodies on the historical sampling. The full information is available for the quotes that are updated when the platform is active. Portfolio instrument deals are made in the same manner as the position opening/closing on standard Forex pairs.
As we can see, the price moves within the limits of the monthly, weekly and daily uptrends. The ParabolicSAR trend indicator and the RSI(10) oscillator confirm the bullish mood. It is also worth noting that the price crossed the Exponential Moving Average upwards, built on the 10-day sampling: we have an additional confirmation signal. The same sampling used to calculate correlations is also used for all the average indicators. We expect this trend to continue at overcoming a new peak at 0.97984. The pending buy order can be placed above this level. Risks are to be fixed below 0.97572. The resistance is confirmed both by Parabolic historical values, and the moving average. Stop Loss is to be moved after the parabolic values every day after the order execution. Thus, we can optimize the return/risk ratio in our favor in the process of changing market conditions.
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