Personal Composite Instruments Technology & Portfolio Trading

IFC Markets offers traders the unique opportunity to realize their trading ideas by creating Personal Composite Instruments (PCI) on the basis of GeWorko Method and trading them. GeWorko Method represents an application of the currency exchange rate concept to a wide range of financial instruments. While the currency exchange rate expresses the value of the base currency in units of the quoted one, GeWorko Method replaces the base and the quoted currencies by US dollar denominated values of two assets or two portfolios. Thus a PCI is structured as a two-portfolio instrument and the PCI value or “price” is calculated as the ratio of base and quote portfolio values, expressing the value of the base portfolio in units of the quoted portfolio.

Buying a PCI involves buying the assets in the base portfolio while simultaneously selling short the assets in the quote portfolio. Trade operations are carried out in opposite directions when a PCI is sold – the base portfolio assets are sold and quote portfolio assets are bought. Profits can be earned from trading PCIs much the same way as from trading conventional financial assets. When the PCI price is expected to rise or, in other words, the value of the base portfolio compared to the value of the quote portfolio is expected to rise, profits can be made by buying the PCI and selling it later at a higher price. In this case profits get generated as proceeds from selling the base portfolio assets after they appreciate following the initial purchase of the PCI exceed the value of the quote portfolio that gets purchased to cover the initial short positions opened when the PCI was purchased. In case the value of the base portfolio compared to the value of the quotation portfolio is expected to fall, profits can be earned by selling the PCI and buying it later at a lower price.

Portfolio Trading on NetTradeX trading – analytical platform

IFC Markets provides NetTradeX advanced trading platform equipped with numerous analytical tools that make it possible to create, analyze and trade the PCIs by creating portfolio combinations from hundreds of conventional instruments – curecny pairs, CFDs on stocks, commodities and indices. The base and quote portfolios can be composed of a single asset each, or a combination of various assets. A complex PCI can theoretically include any number of assets in each of the portfolios compared. The trading platform allows to set the overall dollar value for base and quote portfolios and the individual weights for component assets in them. Assets from almost all segments of financial markets of various countries can be included in the PCI, and the platform automatically calculates the values of the assets and the overall portfolio values in US dollars. The trader then can analyze the behavior of the Personal Composite Instrument he composed by studying the historical chart of the PCI, which the trading platform can display in a separate window. The trader can use the wide range of analytical tools and indicators the platform is equipped with to analyze the PCI behavior and design and test appropriate trading strategies.

How to use the PCI Technology

In essence the traders get an opportunity to create absolutely new trading instruments from conventional financial assets, analyze and trade them. They are no longer constrained by the limited number of available financial instruments that brokers offer them for trading but can create their own instruments based on their knowledge of financial assets and market dynamics. And the flexible PCI composition process, which allows the use of either single assets in the base and quoted portfolios or combinations of various assets, makes the PCI a versatile instrument for the analysis of financial assets and development of successful trading strategies.

The concept of comparing assets via the ratio of their values makes the PCIs perfect instruments for developing trading strategies designed to take advantage of differences in assets’ price dynamics. Particularly, it is a straightforward exercise to analyze and implement pair trading strategies by creating and trading PCIs composed of two separate assets or two portfolios.

In pair trading of two assets, a PCI composed of two assets is used to effectively trade the price dynamics difference between two assets. When one of the assets in the pair is expected to grow more rapidly than the other with general growth of the market, while falling slower than the counterpart in the falling market, profits can be made by going long on the first asset and short selling the second asset of the pair. By creating a PCI in NetTradeX platform with the first asset as the base asset and the second as the quoted asset, the trader can analyze the behavior of the instrument and test his hypothesis. With an up trending PCI chart and further technical analysis confirming his assumptions, the trader can go ahead and buy the PCI and profit from its subsequent sale.

It may happen that a stable long-term correlation between two assets in a pair exists, with the short-term correlation fluctuating around the long-term level. The price of the PCI based on the pair will then be represented by a range-bound curve on the chart with highs and troughs coinciding with the times when the short-term correlations started to return to the long-term level. This presents an opportunity for making a profit by trading the PCI at peak deviations from the average - selling near the highs and buying near the troughs. Pair trading of two portfolios can be similarly implemented by creating and trading a PCI composed of two portfolios.

PCIs can be used to create and trade simple portfolios of assets by quoting baseportfolios against the US dollar and analyzing their behavior. By changing the composition of assets in the base portfolio, the trader can design the one with required return and risk characteristics that correspond to his personal preferences, and trade them. The flexibility of PCI composition process makes it possible to create also portfolios that represent specific industry sector, asset class, market index or regional markets. Portfolios also can be quoted against currencies other than the US dollar.

Complex investment strategies involving purchase of a portfolio of assets while simultaneously selling another portfolio can easily be implemented by creating and trading PCIs. It is simply a matter of creating a PCI with appropriate base and quote portfolios, buying the PCI then involves purchasing the base portfolio while simultaneously selling the quoted portfolio.

Various trading strategies that can be implemented by trading PCIs are presented in more details in articles at IFC Markets website under New Technologies heading.