There you go, a big boom in London and too much exposure in GBP and my account is busted. Call it destiny. I'll withdraw and go spend what's left at the casino. I live just next to the casino here, might as well use it. I've been more lucky with cards theses days. May be you'll see me at World Championship of poker one day. I'll keep this name That's it for me. See ya!
I think this perspective is completely wrong. The question is how much of an "edge" does taking advantage of interest rate differentials inherently have? On the surface it's not much better than just buying a 10-yr note and holding for the 4% or so -- in fact it's much worse, given the directional risk. I guess what I'm saying is that if anyone's "carry" system has any discrete edge to it, it's not because of the yield differentials at all, but the skill in timing and managing "given" positions. Anyone can see that going long AUD or GBP while shorting JPY will maximize your interest income, so by default this in itself cannot be an edge, as the market has already "priced in" the premium of that pair. Why not just open a futures account, place your capital in T-bills to earn risk-free interest, and just trade (or in your terms, "manage") directionally? Is it a coincidence that in every fx brokerage office, there's a manager who has a "guaranteed" system of making money (only he happens to need a quarter million of your money to start or else it isn't worth it) that doesn't require one to "trade"? I visited 2 different fx offices with a friend who was interested in getting into the "game", and both times the manager hinted at some sort of holy grail non-trading system that he couldn't reveal unless we were serious about funding him. . . Anyways, sorry for the intrusion.
illiquid - good and finally an intelligent post here. I do believe tighly correlated and interest different pairs, such as EURHUF, at high leverage, can yield around 20% APR relatively safely. But this is investment-grade, as you point out, not trader-grade. I do this kind of 'interest booster' on a backup account and it's been really good. But also as you point out, unless you've got BIG money, this is not an income strategy.
May god bless those poor innocent victims and loved ones in London most likely on their way to work. Michael B. P.S. If I may, here is a screenshot of the System. I was not awake so there was a missed limit order at the bottom of GBP/CHF (I only carry 1 limit order in each of the three pair and do not line them up for managment simplicity). Perhaps it will dip down there and get it the second time, or the System will be less exposed if it doesn't get it...thats all. The System now rests at base 15 and is relatively calm. But may I note, at base 15 and higher the swings in the unrealized excelerate proportionatly and appear to be rather active. But take into account larger numbers produce this on the surface, but the percentages should conform). Now you can understand why when the system goes flat, I do not jump in with both barrels. Flat times are for "Gambling Meter" restart times. simply use 1k units for each $100.00 in "TRADING BALANCE" when re-starting (After the "Gambling Meter" balance, currently with a goal at 1:6.85).
Today's Trades (Thursday) Website: www.ElectricSavant.com Blog: www.ElectricSavant.com/WordPress I would like to extend my thoughts and prayers to the many that were affected by the London Bombings. Today, Electric took his withdrawal of $458.60 as planned and the spreadsheet reflects that in the NAV. The System has increased it's UNREALIZED DD by 2% and is at 9.1% UNREALIZED DD as a result of the Bombings. The "Gambling meter' is at 1.9188 with a base 15. I found an error in the spreadsheet in the formula's for the increments used to average down with. When Electric changed them to be values that were farther apart, he forgot to copy his changes in the cells to follow. I fixed it and adjusted the current limit orders. As a result of this error there is a slight over exposure. Wifey ZipFile:
Hi Illiquid, I guess this is a long winded way of saying ES's system, especially the carry trades, have no value in itself. However, can the average down part of the system, yield positive result over the long run because of mean reversion? And in the meantime, the interest collection continues, which reduces the drawdown. I do not understand all the rules of ES's sytem, so somebody correct me if I am wrong.
I guess BIG is a matter of relativity. So, if one is contented with 20% APR, and decides to put all his savings into doing it, is he gambling? What say you?
I am not saying ES's system has no value, just that there is no edge to be gained in always going long/short certain pairs for the interest differential. It's similar to holding on long and/or continuously averaging down on a stock just for the dividend; if you're timing is exceptional and you pick relatively "good" moments to add to your position, sure you can come out ahead. But the stock must "come back" within a time frame of your expectations. In response to your question, what if a currency never reverts back to the "mean"? Moves can go on in relatively straight lines for years; could you still be holding short yen from 1985 at 220 to the dollar using this system? It's a possibility to consider. Given the volatility of currencies in general, I don't see how any amount of differential interest could even come close to offsetting the risk of a martingale system. But that's just an offhand opinion of comparing getting a few pips per week vs moves of hundreds of pips of directional risk -- I'm sure ES has dealt with this question earlier on in the thread. If there is an edge to his system, the likely source is from his method of "averaging down", not the ability to subtract one currency's rate from another.
Lets make a deal... Just watch the live trades here and check in from time to time. I am not conotating that I know better. As I have respect for almost every Poster here in this Journal. Thank you for reading and please check in from time to time. Michael B. P.S. Don't forget there is "cross averaging" from seemingly independant correlated pair. And there is no fear for taking losses when profitable positions permit...