A second popular strategy for active currency managers is the “trend-following” strategy, which involves using several technical moving averages to provide trading or hedging signals. Active currency managers can use this strategy to either trade around their benchmark in order to add alpha, or alternatively to provide a hedging signal. The academic backing for trend-following strategies is as deep as that for the differential forward strategy, including works by Bilson (1990, 1993), Taylor (1990), LeBaron (1991) and Levich and Thomas (1993), which showed that these strategies can indeed produce consistent excess returns over sustained periods of time. I would suggest however that the seminal breakthrough in this area came in the form of the note by Lequeux and Acar (1998), which gave the strategy more specific properties by suggesting that in order to be representative of the various durations followed by investors an equally weighted portfolio based on three moving averages of 32, 61 and 117 days would be most appropriate. Simply put, the core idea behind this strategy is to go long the currency pair when the price is above a moving average of a given length and to go short the currency pair when it is below. More specifically, if the spot exchange rate is above all three moving averages, hedge the foreign currency exposure 100%. If it is above only two out of the three moving averages, hedge one-third of the position. In all other cases, leave the position unhedged.

• Previous Entry: Differential Forward Strategy
• Next Entry: MEASURING CURRENCY RISK — VAR AND BEYOND