ElectricSavant, Thank you for the generous contributions. I am extremely intrigued. You seem to want to keep the thread on-topic for teaching beginners with this concept. So! As someone who knows absolutely nothing about FX, allow me to ask some completely newbie questions that might serve to benefit other complete newbies who want to follow along. Right, I've just signed up with OANDA FXGame, not knowing any other better. They seem to fit the criteria you outlined in terms of interest payments and singe unit capacity...but I may be missing something as it's all new to me. I've read the info on the OANDA site detailing the basics of what FX trading is all about and how it works etc. Got it. More pertinently I've read the info on continuous interest payments/charges etc. Got it. I've played around with their platform and made some trades. All looks pretty straight forward. Charting leaves a little to be desired. Got a handle on margin, NAV etc. Lost some PIPs lol....but I guess the trading part of it isn't really that important for Cash & Carry (Standard). Now for some clarifications/re-iterations: 1) The concept is: by holding certain currency pairs in the right direction, either long or short, you can get paid interest for that pair e.g. by going long NZD/USD you would earn 133.75%APR 2) In theory, if the currency pair did not move at all, you could just hold that pair and earn the interest indefinitely (assuming interest rates didn't change also). Holding the pair means never closing the trade. 3) The reality is that currency pairs do move up and down and this will result in unrealised/paper profit and loss (UPL) whilst you are earning the interest. 4) So the key is to be able to withstand the fluctuations of UPL, avoiding margin call etc. whilst earning this interest. 5) One way of achieving this is to utilise multiple currency pairs in order to smooth out the overall fluctuations in UPL at the expense of earning possibly lower interest. Utilising multiple currency pairs in this way is the hedge. Hopefully I've got that all right. Correct me if I'm off anywhere. Now for some queries. You said: I was unable to confirm/deny this from the text on the OANDA website....but are you really saying that you get paid interest on the fully leveraged amount? I'm almost wetting myself if this is correct but it seems to make sense. Extreme Example: $10,000 account. 50:1 leverage. Therefore, $500,000 leveraged amount. Long AUD/JPY @ 251.75% APR for full leveraged amount (I know you wouldn't but...) = $1,758,750.00 from $10,000 account in one year. This would be under the false assumption that AUD/JPY didn't fluctuate at all. Can this be right? I know you wouldn't use the full amount and presumably this is where the base exposure factor comes in. In addition, hedging with multiple currency pairs brings down the APR to your target of 32% APR? (or is that from the exposure factor or both?) etc. but is the principle and calculation I've outlined here in this extreme example correct? If it is, then I'm unclear on why you state 32% APR/ROI since the APR will be applying to the leveraged amount but the ROI should be a function of your unleveraged amount. Therefore ROI is much higher. Just need a small clarification on that point. Furthermore, would it be possible to re-invest the interest earnings back into the account so as to compound gains further to an even more ridiculous level or am I getting carried away? Ok, moving on to slightly more down to earth aspects of the strategy, in no particular order: 1) Further to an earlier poster's comments on correlation/non-correlation. Would it be possible to find suitably anti-correlated pairs from a statistical point of view so that you could optimise or rather minimise the UPL fluctuations to a point of negligibility OR is this basically what the combination of pairs the spreadsheet contains does? Are the pairs and the ratios/weightings on the spreadsheet the result of this type of analysis already i.e. can we assume that a roughly optimal combination has already been chosen. 2) Total newbie question: why is it important to be USD and EUR neutral in this strategy? 3) I see that OANDA have an API ($600/month) and it seems quite straightforward to have this strategy automated (for medium term periods). Are there any fundamental reasons why this couldn't be done? 4) Is this a scalable strategy? i.e. if lots of people start doing it or if people start using large amounts of money, will it still work? Does the dealer/market maker lose out? It doesn't seem like they do, so who does? Is this a "loophole" that might get closed? I can't see how or why but it's all new to me. 5) On your spreadsheet, is the main purpose of the first sheet, to maintain a running total of NAV so that the second sheet can use that NAV and apply the base exposure factor to it? What other purpose does it serve? 6) Ok, little confused by some instructions on the spreadsheet: Okay, the Base Exposure Column is calculated based on the current NAV and the user defined Base Exposure Factor. Got it. So if the Base Exposure Column shows a value that is lower than the number of units you ACTUALLY have in NZD/USD - how do you make the adjustment so that it comes into line without selling???? And why do you have to wait until the next day at reporting time? I'm sure it's obvious but the answer eludes me at this time. 7) More recently: I suspect this is the same point as above. Right now, I'm not sure what you actually mean by saying there is never decreasing. 8) You said: If your Uncle Point is 30%, does that mean, when you've accumulated 30% profits/ROI that you have eliminated risk? Is that because from that point on you only use the money from profit for the strategy? Or am I missing something obvious once again. I think I'll leave it at that for the moment as I'm sure things will become clearer once I actually try out the system. Do you or anyone know if with the FXGame they also simlulate the interest charges/payments? Thanks again for your generous contributions. Momoney.
ElectricSavant, Thank you for the generous contributions. I am extremely intrigued. You seem to want to keep the thread on-topic for teaching beginners with this concept. So! As someone who knows absolutely nothing about FX, allow me to ask some completely newbie questions that might serve to benefit other complete newbies who want to follow along. Right, I've just signed up with OANDA FXGame, not knowing any other better. They seem to fit the criteria you outlined in terms of interest payments and singe unit capacity...but I may be missing something as it's all new to me. I've read the info on the OANDA site detailing the basics of what FX trading is all about and how it works etc. Got it. More pertinently I've read the info on continuous interest payments/charges etc. Got it. I've played around with their platform and made some trades. All looks pretty straight forward. Charting leaves a little to be desired. Got a handle on margin, NAV etc. Lost some PIPs lol....but I guess the trading part of it isn't really that important for Cash & Carry (Standard). Now for some clarifications/re-iterations: 1) The concept is: by holding certain currency pairs in the right direction, either long or short, you can get paid interest for that pair e.g. by going long NZD/USD you would earn 133.75%APR 2) In theory, if the currency pair did not move at all, you could just hold that pair and earn the interest indefinitely (assuming interest rates didn't change also). Holding the pair means never closing the trade. 3) The reality is that currency pairs do move up and down and this will result in unrealised/paper profit and loss (UPL) whilst you are earning the interest. 4) So the key is to be able to withstand the fluctuations of UPL, avoiding margin call etc. whilst earning this interest. 5) One way of achieving this is to utilise multiple currency pairs in order to smooth out the overall fluctuations in UPL at the expense of earning possibly lower interest. Utilising multiple currency pairs in this way is the hedge. Hopefully I've got that all right. Correct me if I'm off anywhere. Momoney, wow. Thank you for explaining items of the system more clearly. I obviously, suffer from a lack of communication skills and when I read your post, I wish I would have said it the way you did...thanks again... Now for some queries. You said: I was unable to confirm/deny this from the text on the OANDA website....but are you really saying that you get paid interest on the fully leveraged amount? I'm almost wetting myself if this is correct but it seems to make sense. There are liners available for the old ladies, available in the supermarkets, try those Extreme Example: $10,000 account. 50:1 leverage. Therefore, $500,000 leveraged amount. Long AUD/JPY @ 251.75% APR for full leveraged amount (I know you wouldn't but...) = $1,758,750.00 from $10,000 account in one year. This would be under the false assumption that AUD/JPY didn't fluctuate at all. Can this be right? I know you wouldn't use the full amount and presumably this is where the base exposure factor comes in. In addition, hedging with multiple currency pairs brings down the APR to your target of 32% APR? (or is that from the exposure factor or both?) etc. but is the principle and calculation I've outlined here in this extreme example correct? no its 251.75% on 10k, what I was trying to say that is why its such a high percent as its on the leveraged amount but calc'd off of the 10k invested. If it is, then I'm unclear on why you state 32% APR/ROI since the APR will be applying to the leveraged amount but the ROI should be a function of your unleveraged amount. Therefore ROI is much higher. Just need a small clarification on that point. Furthermore, would it be possible to re-invest the interest earnings back into the account so as to compound gains further to an even more ridiculous level or am I getting carried away? Don't do it, I tried it and your asking for a margin call. Let the UPL in your hedge, more accuratley dictate to you when you should "add to" Ok, moving on to slightly more down to earth aspects of the strategy, in no particular order: 1) Further to an earlier poster's comments on correlation/non-correlation. Would it be possible to find suitably anti-correlated pairs from a statistical point of view so that you could optimise or rather minimise the UPL fluctuations to a point of negligibility OR is this basically what the combination of pairs the spreadsheet contains does? Are the pairs and the ratios/weightings on the spreadsheet the result of this type of analysis already i.e. can we assume that a roughly optimal combination has already been chosen. This basket is the best combo I have experienced and traded live, but I am still testing other baskets. 2) Total newbie question: why is it important to be USD and EUR neutral in this strategy? USD controls the movements of the entire Forex market. EUR is second and follows the USD. 3) I see that OANDA have an API ($600/month) and it seems quite straightforward to have this strategy automated (for medium term periods). Are there any fundamental reasons why this couldn't be done? There are discretionary adjustments made to the base exposure factor, and this is a once a day system, not requiring automation. 4) Is this a scalable strategy? i.e. if lots of people start doing it or if people start using large amounts of money, will it still work? Does the dealer/market maker lose out? It doesn't seem like they do, so who does? Is this a "loophole" that might get closed? I can't see how or why but it's all new to me. This is Currencies...no problem 5) On your spreadsheet, is the main purpose of the first sheet, to maintain a running total of NAV so that the second sheet can use that NAV and apply the base exposure factor to it? What other purpose does it serve? As a report and chart. Also some TradeVestor's claim it exists to make this system more complicated than it really is 6) Ok, little confused by some instructions on the spreadsheet: Okay, the Base Exposure Column is calculated based on the current NAV and the user defined Base Exposure Factor. Got it. So if the Base Exposure Column shows a value that is lower than the number of units you ACTUALLY have in NZD/USD - how do you make the adjustment so that it comes into line without selling???? And why do you have to wait until the next day at reporting time? I'm sure it's obvious but the answer eludes me at this time. Never sell, just wait for the actual to catch up to your posturing. 7) More recently: I suspect this is the same point as above. Right now, I'm not sure what you actually mean by saying there is never decreasing. 8) You said: If your Uncle Point is 30%, does that mean, when you've accumulated 30% profits/ROI that you have eliminated risk? Is that because from that point on you only use the money from profit for the strategy? Or am I missing something obvious once again. You have it correct. An additional important item to note is the policy of your dealer/marketmaker. When using leverage it is impossiblle to eliminate risk, as a negative balance could come back and haunt you and take back the profits you banked, unless your dealer/marketmaker says IN WRITING that you may never have a negative balance. In item 15 B of my customer agreement I have that clause. I think I'll leave it at that for the moment as I'm sure things will become clearer once I actually try out the system. Do you or anyone know if with the FXGame they also simlulate the interest charges/payments? Thanks again for your generous contributions. Momoney.
Doh! Have no idea what I was thinking. It was early in the morning :eek: OK. Will try and see how this works. OK. Noted. Before I go off and research, can you recommend any good sources for historical FX data? Got it. Yes but I'm lazy to even fill in a spreadsheet. Always looking for a way to automate the tiniest of tasks. Are you saying that it's not feasible to extract heuristics for the discrectionary adjustments so as to be made mechanical? Leaving aside the effort/reward characteristics of undertaking such a task. I was thinking, in future this could be extrapolated to dynamically adjust the basket of pairs to self-optimise the mix through various feedback mechanisms etc. I know this is jumping waaaaaay ahead.........probably OT. OK. Got it. OK. I suppose this is one of those things I have to experience to "get it". Thanks for all of your responses. I'm eager to test this system out. 20 odd percent per annum for minimal work is not to be sneezed at. I'm sure I'll be back with more questions later! Momoney.
momo Don't try and reinvent the wheel... Your optimization and research will only increase your labor. I have been through all of this in other forums including this one... Just make your 32% per annum and follow the spreadsheet and be happy. My dealer has a history link: http://www.oanda.com/convert/fxhistory Michael B.
Well Folks it was a nice time to post here in ET. This is time to end this Journal, as I am going to take some time off from trading. See you next year. Thanks for reading, and I hope you have considered this time well spent. I will be back with more Journals and baskets, for your reading pleasure and edification. Remember to not get lazy and keep your spreadsheets near... Michael B.
I think it bears repeating that there is NO inherent edge in playing nominal rate differentials in a passive carry mode. Unless you have the ability to anticipate one currency's rates rising or falling vs another BEFORE the street prices it in, you will have no advantages simply going long a higher yielding currency vs a lower one. In the end, you will essentially just be competing with other carry trade positions which may have been opened far earlier than you. When everyone else gets out of that trade, whatever interest you've accrued over months can very easily be wiped out in a matter of days. The rate differential is priced in already. I'm sure there are some traders who can successfully implement the tendency for other traders to continually lean in one direction in certain currency pairs to their advantage, but it's a far more complex process than just buying X and shorting Y because one yield is higher than the other. There is just no getting around the necessity for good timing, as with any other method of trading.
Illiquid, Could you explain this and how the mechanics of it would be in Retail Spot Forex? My dealer/marketmaker quotes mimick the other dealer marketmakers and I am told very near the EBS, but I have not confirmed that. So the interest that is paid to the balance is not reflected in a "shadowed" price, as my dealer/marketmaker does not adjust price in a rollover scheme. In Futures I may agree with you...those are contracts that expire. Also you do not seem to recognize the hedge? Who cares if one moves against, when one move opposite? This basket is EUR and USD neutral. Michael B. The rate differential is priced in already.