A new study shows that momentum trading yields the best results - but there's a catch.
The advice comes fast and furious in currency markets. Everybody's an expert, and everyone can point to a favorite trading plan.
But now comes a serious analysis of FX trading strategies, and ladies and gentlemen, we have a winner: momentum trading.
According to The Wall Street Journal, a forthcoming study in the Journal of Financial Economics found that - in the simplest terms - buying currencies when they are rising and selling them when they are falling can yield returns of up to 10% per year.
Great, right? Well, it's not that simple. Apparently the biggest gains come from small, less liquid currencies, and transaction costs for those currencies can be extremely high. Also, those currencies are prone to big moves up and down, so timing is critical. In the words of Lucio Sarno, a professor at City University London's business school and a co-author of the study, “Highly idiosyncratic movements of a currency make it harder for potential speculators to hedge their positions."
One other problem: returns from this strategy can be highly variable, even over a period of years. If you decide to attempt momentum trading of this kind, be prepared to have a long, long investment horizon.
Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.
Learn more: The essential vocabulary for currency trading is on Key Terms Dictionary. Top currency strategies are broken down for you in Currency Class.
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