Here’s a simple way to make money in currencies…

Buy what’s working. And sell what’s not.

Sounds simple, but it’s worked.

Many studies have shown this “momentum effect” is true. In one study, Deutsche Bank tested an incredibly simple once-a-month currency-trading system, with excellent results. From 2000 through 2010, this simple strategy would have delivered a 6% annualized total return, versus 0% for the stock market.

[ad#Google Adsense]Longer term, the results are good too… Since 1980, this simple trading system has delivered a compound total return of 8%, versus 11% for the stock market.

The simple currency system didn’t beat the stock market since 1980… But that’s OK. It delivered much less volatile returns than the stock market.

Take a look for yourself, stocks are in red below and the currency system is in blue (both are total returns):

In 2008, when everything went down – stocks, commodities, and real estate – this currency system was up over 20%. It wasn’t just 2008… Stocks fell in six separate years since 1980. And this currency system was up in each of those years. It was a great way to add some diversification.

So what’s the system? Here it is:

  • Buy whatever three currencies have performed the best over the last 12 months.
  • Sell short the three currencies that have performed the worst over the last 12 months.
  • One month later, size ’em up again, and rebalance as necessary.

Seems too simple to work. But it has.

This system tracks the 10 most easily traded currencies: the Australian dollar, Canadian dollar, Swiss franc, British pound, Japanese yen, Norwegian krone, New Zealand dollar, Swedish krona, U.S. dollar, and the euro.

Surprisingly to me, no one currency dominates in the trades…

Based on the Deutsche Bank study of this system, from 1989 to 2009, the Swiss franc had the biggest extremes… You were long Swiss francs 41% of the time. And you were short Swiss francs just 22% of the time. Those were the two extremes… In short, no currencies were left “sitting the bench” for long stretches. They’re all in the game.

There’s no “cherry picking” going on in Deutsche Bank’s strategy… It simply uses the one-year gain and rebalances monthly, among the 10 most-traded currencies. Nothing fancy there. And it’s worked.

Deutsche Bank has a fund that uses this strategy, based on its Currency Momentum Index. The Yahoo Finance symbol is DX2M.DE. (While it trades in Europe, it closely tracks the U.S. dollar Deutsche Bank Momentum Index.)

For more on this currency momentum fund, visit www.etf.db.com. Click on “Germany”… then, to read it in English, click on the British flag at the top right.

While I’ve talked about this specific study and this specific fund, my point today isn’t for you to run out and buy this fund… My real point is to show you investing in currencies can work.

This simple Deutsche Bank system is one example that shows it. It delivers decent returns. And best of all it’s been uncorrelated to stocks, real estate, or commodities.

Good investing,

— Steve Sjuggerud                                                 Source:  Daily Wealth

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