**FX INDEX ARB **> Strategy

**FX INDEX ARB (FXIA) **is a systematic,
quantitative currency trading program, which trades the currencies of developed
countries (G10 currencies) in the cash ("spot") markets. It uses statistical
methods - quantitative analysis of time series of currency prices. It does not
use technical or fundamental analysis, pattern recognition techniques or
discretionary trading decisions.

__
Diversification.__ One of the most important aspects of the FX Index Arb –
Currency Trading Program is diversification, the ability to trade simultaneously
many currency pairs. The strategy creates a complex portfolio of 10 global
currencies and adjusts its components daily. The mathematics of portfolio
diversification show that diversification of currencies can lead to better
reward/risk ratio than with individual currency pair.

__Currencies
traded.__ Tests show the FX
Index Arb can work with arbitrarily selected currencies. The current trading
program trades USD, EUR, GBP, CHF, CAD, NZD, AUD, SEK, NOK and SGD, given their
excellent liquidity and tight bid/ask spreads. The strategy is non-parametric,
i.e. there are no parameters to optimize, except the leverage multiplier and
position size limits. The
strategy was also tested on a completely different market (a portfolio of 100 US
stocks) with good results. This proves that
the system is very robust and it
does not depend on any particular price pattern (which most trading systems
depend on).

__Strategy.__
The strategy opens long/short positions in various currency pairs. As stated
before, due to portfolio diversification, the risk is more limited than if just
one currency alone is traded. The strategy forms indexes of the 10 base
currencies, which depend on the prices of the remaining 9 currencies against the
index currency. It trades the components of each index (counter trend, short
gamma) against the index itself (trend following, long gamma). Exactly the same
rules are used for counter trend and trend trading. The point is to make use of
the higher volatility in individual components against the lower volatility of
indexes (as proven by the Modern Portfolio Theory).
Based on positions of components and
indexes (a total of 90 currency crosses), positions are then consolidated into
the base 10 currencies, i.e. 9 currency pairs against the US Dollar. The
resulting positions are then implemented in the market. The trading strategy is
always in the market, but portfolio weights are adjusted daily.

__Profit generation process.__
Each currency pair, depending on its portfolio weight and its daily price
return, has a contribution to strategy daily rate of return (ROR). Since there
are many long/short positions in various currency pairs of variable exposure,
some positions will produce positive and some negative rates of return. The
strategy, through active portfolio composition and adjustment, attempts to
generate positive returns over time. The strategy is in the market 100% of time
and daily rates of return are calculated on a mark-to-market basis.

__Leverage.__
Strategy standard risk parameters employ an average combined leverage around
0.75 for the entire portfolio (the USD value of long portfolio components
against the short portfolio components, relative to account size). The maximum
leverage should not exceed 2.5. There is a position size limit for each currency
against the USD of 0.8, relative to account NAV (Net Asset Value, or trading
size).

__Margin to
equity ratio.__ The amount
of an account’s net assets committed to margin will vary as a result of market
conditions and portfolio composition. On average, 1.6% of net assets of an
account will be committed to margin (if margin requirement for a 100,000
currency lot is $1,000). Based on strategy back testing, the maximum
margin-to-equity ratio should not exceed 5%. If client’s FCM/FDM (Futures
Commission Merchant / Forex Dealer Member) increases margin requirements
(because of market volatility, illiquidity or otherwise), the percentage of net
assets committed to margin may increase to levels beyond the stated values.

__Risk control__
is achieved through a variety of means which in most market conditions should
minimize drawdowns. The first is portfolio construction and diversification
(trend and counter trend trading in indexes and their components); second is
portfolio concentration control through position size adjustment according to
account size, volatility and risk-reward analysis; and third is catastrophic
stop based on money management rules.

__Strategy
developer. __You can read
here
about the trading strategy developer.

**
Risk Disclaimer**

THE RISK OF
LOSS IN TRADING FOREIGN EXCHANGE (FOREX) CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY
CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL
CONDITION AND INVESTMENT OBJECTIVES. PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS. THE PERFORMANCE QUOTED REPRESENTS PAST PERFORMANCE
AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER. TRADING IN FOREIGN EXCHANGE IS
SPECULATIVE AND MAY INVOLVE THE LOSS OF PRINCIPAL; THEREFORE, FUNDS PLACED UNDER
MANAGEMENT SHOULD BE RISK CAPITAL FUNDS THAT IF LOST WILL NOT SIGNIFICANTLY
AFFECT ONE'S PERSONAL WELL BEING. THIS IS NOT A SOLICITATION TO INVEST AND YOU
SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION PRIOR TO MAKING ANY
INVESTMENT OR ENTERING INTO ANY TRANSACTION. PLEASE SEE THE COMPLETE FXIA
**
DISCLOSURE
DOCUMENT.**