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Thread: Using Risk Parity

  1. #1
    Join Date
    Aug 2014

    Default Using Risk Parity

    Risk parity in foreign exchange results when there is no price differential in trading. This state of affairs greatly reduces or omits totally any opportunities of arbitrage profits in forex strategy. It still allows for profits to be made by long term investors, however.

    Those seeking to profit from arbitrage trades capitalize on inefficiencies in the market. An opportunity for an arbitrage profit results when a foreign currency unit is selling at different prices in different exchanges. To profit, a buyer will quickly buy the foreign currency in one market at a lower price, and then sell it in another at a higher price. The price differential is booked as profit.

    The condition of risk parity is based on capital mobility and perfect information in the foreign exchange markets, as with all others. For capital mobility, there is present the means that funds will seek the most effective methods to profit from the most efficient usage. The advanced technology of today guarantees that this element remains a constant and is also continually being improved.

    That too is almost the case for perfect information. This element of the efficient market schools of thought is that all available information has been accurately factored in the price of an asset, which minimizes trades based on a flaw in the system. If that were true, however, there would be no school of value investing that has resulted making Warren Buffett, its most prominent practitioner, worth over $50 billion and considered by many to be the best ever.

    What accepting risk parity allows for is the opportunity for those who buy and sell in a forex strategy to profit like Warren Buffett, from long term movements in the price, hopefully upwards. Buffett has noted that Newton’s Fourth Law should be the greater the movements of a speculator, trader or investor, the lesser the returns. As Buffett has often stated about his holding period, “Long term is forever.”

    That is the opposite of an arbitrage forex strategy, which seeks to profit from market inefficiency in the pricing of a like asset. As Benjamin Graham, the founder of the value school of investing and inspiration for Warren Buffett has noted, speculators seek to profit from the conditions of the market. Investors seek to profit from the condition of the asset.

    Arbitrage is pure speculation as risk parity is long term investing.

    Profits are hoped for from a forex strategy based on the inefficient pricing of one foreign currency unit in one market as opposed to that price level for it in another. The last thing the punter wants to happen is to be caught in a position that results in a long term holding in foreign currency that was incorrectly thought to be a short term gain. Risk parity protects the long term investor who minimizes trades from being caught in that painful, costly position.

  2. #2
    Join Date
    Jan 2015


    The risk parity approach to portfolio asset allocation focuses on the amount of risk in each component rather than the specific dollar amounts invested in each component. In other words, risk parity focuses not on the allocation of capital (like traditional allocation models), but on the allocation of risk. Risk parity considers four different components: equities, credit, interest rates and commodities, and attempts to spread risk evenly across the asset classes. The goal of risk parity investing is to earn the same level of return with less volatility and risk, or to realize better returns with an equal amount of risk and volatility (versus traditional asset allocation strategies).

  3. #3
    Join Date
    Jan 2015


    A portfolio allocation strategy based on targeting risk levels across the various components of an investment portfolio. The risk parity approach to asset allocation allows investors to target specific levels of risk and to divide that risk equally across the entire investment portfolio in order to achieve optimal portfolio diversification for each individual investor. Risk parity strategies are in contrast to traditional allocation methods that are based on holding a certain percentage of investment classes, such as 60% stocks and 40% bonds, within one's investment portfolio.

  4. #4
    Join Date
    Nov 2014


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arbitrage, exchange, forex, forex strategy, information, level, long term, markets, short term, spread, strategies, strategy, system, trader, trading

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